Revising Stronger On Reduced Near-Term Risks From US Relations

Goldman Sachs note that "the process of gradual economic disengagement between the US and China will probably continue for some time, regardless of who wins this year's US presidential election. But our USD/CNY forecasts had assumed rising volatility ahead of election day, with bilateral relations between the two countries featuring prominently in the race. Although we cannot rule out rising tensions over the next eight weeks, we now see less short-term risks for the cross. First, currency markets appear to be reacting less to negative headlines - e.g. news related to TikTok - perhaps reflecting Vice President Biden's lead in the polls. Second, President Trump has begun to emphasize other issues, especially a "law and order" message, in the late stages of the campaign, and appears to be sticking with the partial trade and tariff agreement reached in January. Relations between the two countries will likely continue affecting the cross, but we think they are not enough to prevent the Yuan from participating in broad Dollar weakness, especially given the good performance of the domestic economy. We are therefore revising our forecasts this week, to 6.70 for 3 months, 6.60 for 6 months, and 6.50 for 12 months (from 7.05/6.90/6.70 previously); the changes imply 12 months appreciation in the CFETS basket of just over 3%."