Goldman Sachs: Still Sensitive To Positive U.S.-China Headlines

Goldman Sachs note that "ahead of last week's meeting between Chinese President Xi and U.S. President Biden, expectations had built among some investors re: concrete and positive headlines around the U.S.-China relationship. While the meeting did have a positive tone overall, as it became clear that some of the boldest of these expectations - in particular, that there could be an announcement of specific tariff reductions - were not realised, USD/CNH rose. Still, during another difficult week for EM FX vs. the USD, CNY held relatively firm. We think this CNY stability can continue over the near term, and we expect gradual CNY appreciation in the year ahead. While the global forces that have supported China's current account during the pandemic period may ease, and while the interest differential between China and its key trading partners may narrow, cyclically a fair amount of negativity is already reflected in the CNY, and any sequential stability in growth, or clarity around the policymaker objective function, could bring some near-term relief."

• "As the week's price action has shown, positive surprises on tariffs or trade relations between China and the U.S. could send USD/CNY lower, and we continue to think that targeted US "tariff exclusions" in response to requests by U.S. companies remain a possibility in coming weeks and months. And, continued passive inflows from bond-index inclusion could continue to support our view that USD/CNY can eventually grind lower towards CNY6.20 in the year ahead."