Goldman Sachs: FX Fundamentals Outweigh Softer Growth

Goldman Sachs note that "in a week where official data confirmed the weakness of activity growth in the third quarter, at first glance it may seem odd to see USD/CNY break below our 3-month forecast of CNY6.40. But in so doing the dollar cross is still in the process of catching up to the CNY on a trade-weighted or a CFETS basket basis, which has strengthened pretty consistently through the year."

• "In part this reflects the unusually marked contrast between the weak cyclical trajectory of the Chinese economy this year, and some of the structural forces that have been currency supportive for most of the year. These include cheap valuations, in part reflecting consistent strength in the external balance, and continued inflows into the local bond market that offers not only a meaningful yield pick-up but also attractive diversification for global fixed income portfolios."
• "While some of that yield pick-up may erode as global core rates continue their climb higher, the sequential pick-up in growth in our baseline forecasts should limit the risk of monetary easing, and at the same time index inclusion and reserve allocations should continue to drive inflows. All that said, for a more substantial move towards our 12-month forecast of CNY6.15, it will be important to see meaningful relaxation in the trade frictions with respect to the U.S. and a clearer trend lower in the greenback."