Goldman Sachs Revises Higher USD/CNY Forecast Profile

The US bank has revised higher its USD/CNY forecast profile, see below for more details.

Goldman Sachs: "More Objectives, Less Clarity. China’s already challenging policy calculus appears to have acquired a new objective this week. On July 1st, the PBOC announced that it would start to borrow CGBs from primary dealers to stabilize bond yields, and long-term CGB yields have ticked higher. Whereas a soft macro backdrop, further declines in property market prices and weak domestic demand justify lower rates across the curve, policy authorities appear to want to set a floor for long-term CGB yields which have been declining steadily and maintain some steepness in the yield curve. Our economics team continues to expect more policy easing in the coming months, including a 25bp RRR cut in Q3 and a 10bp policy rate cut in Q4 to support weak domestic activity. And while interest rates should trend lower in the medium term given declining potential growth, there are clearly upside risks given this new set of policy interventions. Higher local rates may also mean some increased risk of a reversal in CNY which has also been depreciating steadily, but ultimately we continue to expect a gradual depreciation given the still wide interest rate differential with the US and growing tariff risks as we get closer to the US elections. Here too policy authorities have been managing the pace of depreciation via a strong CNY fixing, and until larger shocks like tariffs or a change in US policy settings are crystallised, we continue to expect a gradual pace of depreciation to extend, and the CNH to remain a popular funder for carry trades and tail-hedges. With spot USD/CNY now moving close to our 3m forecast of 7.30, we are revising higher our forecast path to 7.35, 7.40 and 7.40 in 3, 6 and 12 months (from 7.30, 7.25 and 7.20 previously).