Goldman Sachs: Domestic Tailwinds Overwhelming US-China Risks

Goldman Sachs note that "over the past month, domestic tailwinds have driven the CNY to outperform both the Dollar and its NJA peers. Our 12-month USD/CNY forecast of 6.70 reflects the fact that, over the medium-term, we think these tailwinds can extend. First, incoming data on growth, manufacturing activity and exports, while not the sharp 'V' of Q2, continue to be encouraging; in the year ahead, we expect Chinese policymakers to keep fiscal policy relatively accommodative (e.g., including more government bond issuance and more policy bank loans), which should support the growth recovery. Second, given policymaker concerns around structural issues associated with broad monetary policy easing (such as rising financial leverage), the gap between Chinese and US interest rates could remain CNY-supportive. Third, China's bond market also continues to see inflows, due to index inclusion and the favorable interest rate differentials. Finally, if China's coronavirus management remains credible on a relative basis, this can continue to support the Yuan. Over the near-term, however, US-China tensions remain a risk. While the Yuan has remained resilient to recent headlines, this may be due, in part, to Biden's current polling advantage; if polls continue to narrow, headlines may begin to impact the currency more, and near-term upside risks to USD/CNY may increase."