Goldman: Not Convinced On Bear Case Despite Domestic Equity Weakness

Goldman Sachs note that “the normally low-volatility CNY weakened meaningfully vs. the USD during March 11-15. The proximate causes appeared to be the large drawdown in domestic equities, rising covid cases in the country (though the effect of lockdowns on the currency is debatable), two days with a surprisingly weak CNY fixing, and perhaps uncertainty over China’s relationship with Russia (President Biden and Xi met Friday to discuss the Russia-Ukraine conflict). Despite the recent wobbles we are not ready to pivot from our generally constrictive view on the currency. Most importantly, while near-term data will likely suffer from covid lockdowns, the trajectory for macro policy should improve. As our China economics team recently noted, Vice Premier Liu He’s Financial Stability and Development Committee meeting on March 16 gave a clear signal on the desire for accommodative policies. Our economists expect a friendlier policy environment in the coming months, not only in terms of monetary and fiscal easing but also in terms of coordination of industry-level regulations. While policy rate cuts could be a negative for the currency, we would expect the CNY to stabilise if policy easing lifts investor expectations about growth for the balance of the year. We therefore maintain our forecasts for moderate spot appreciation vs. USD for now (6-month target of CNY6.30 and 12-month target of CNY6.20).”