CNY: Goldman Sachs Still Expecting USD/CNY Fix TO Gravitate Higher

Goldman Sachs: "CNY: The expectations game. The 10% tariff imposed on China (with few exceptions so far) already raises the effective rate equivalent to the entirety of Trade War 1.0. But you wouldn’t know that from the reactions in Chinese assets. To a large extent that reflects expectation management. The imposed 10% is much lower than large numbers like 60% tariffs on China that were threatened ahead of the election, and in fact much of the post-election tariff bluster has instead been focused on allies such as Canada, Mexico and Europe. More lately, talk of reciprocal tariffs would also leave China relatively unscathed compared to other EMs such as India and/or Brazil. On the China side as well, the response to the 10% tariff imposition has been far less than proportional, the commentary notably restrained, and the USD/CNY fix moved slightly stronger from ~7.19 to ~7.17. At the same time, a combination of better earnings and sentiment around China tech stocks has propelled the offshore index beyond its 2024, post-stimulus optimism highs; confirming that if policy tails are avoided, there may be greater scope to price relief in non-US assets. Whether this calmer, more constructive backdrop in Chinese markets extends is still an open question however, and much will depend on whether further US trade actions are more disruptive than investor expectations. Our economist baseline still calls for additional 10% tariffs on China plus tariffs on critical exports, and if this combination or something more is delivered in coming months, we would expect to see the USD/CNY fix start to move higher again. While the CNY is a hard currency to value – as Treasury Secretary Bessent confirmed yesterday – that would push it further into undervaluation territory versus the Dollar on our metrics."