The US investment bank Goldman Sachs sees a strong overvaluation of the US dollar against the Chinese yuan. This is how the currency pair is likely to continue to develop.
• Goldman Sachs believes US dollar is overvalued
• Chinese yuan undervalued by around 20 percent
• Yuan is expected to appreciate in the next six to twelve months
According to MarketWatch, the Goldman Sachs forex strategy team led by Kamakshya Trivedi recently gave an overview of the development of the US dollar against the Chinese yuan and put into words what has long been only whispered about in the currency markets: the strong overvaluation of the US dollar against the yuan.
The strategy team estimates that the yuan is currently around 20 percent undervalued compared to the greenback. In other words, if the yuan were actually trading at the levels that economic fundamentals suggest, it would be significantly stronger against the dollar than it currently is.
Current exchange rate
The exchange rate between the US dollar and yuan is currently around 6.8016. Goldman Sachs predicts that the yuan will appreciate to a rate of 6.7 within the next six months, and within twelve months the currency should even appreciate to 6.5, which would correspond to a percentage increase of around 4.43 percent.
Large trade surplus
The bank sees the causes of the imbalance in various factors. The People’s Republic has a trade surplus, which, according to Goldman Sachs, is likely to increase given the favorable currency and the competitiveness of exports. The bank is already pointing out that China’s foreign trade surplus as a percentage of global GDP has reached unprecedented levels.
Although the oil price shock triggered by the blockade of the Strait of Hormuz had a temporary impact on China’s trade balance, the upward pressure on the domestic currency had reached a “state of equilibrium” due to the foreign trade surplus.
Focus on clean energy
Additionally, according to Trivedi’s team, the energy price shock would mean that “global investments in energy security and renewable energy are likely to accelerate.” This is a positive impulse for China in the medium term, as the country has already established a strong position for clean energy in its supply chains.
China has long tried to prevent an appreciation of the yuan in order not to endanger its export surplus. Nevertheless, the People’s Republic is unlikely to be spared from rising inflation, which could also push up the currently low interest rates. But even as Goldman Sachs now predicts the currency will appreciate, the bank also concludes that the yuan is “at one of the most favorable levels in recent decades on a real trade-weighted basis” against the U.S. dollar based on a weighted average of its two valuation models, MarketWatch quoted the GS report as saying.
Sino-American trade war
Another factor that is likely to influence the currency pair is the ongoing trade war between the US and China. As the tariffs imposed by both nations escalated, this led to a devaluation of the yuan against the US dollar. However, this partially offset the impact of the tariffs on the prices of Chinese imports to the US. A weaker yuan actually turned out to be a natural hedge for Chinese exporters, CryptoBriefing summarizes.
What does this mean for investors?
Goldman Sachs does foresee an appreciation of the yuan, but this will be moderate with an increase of 4.43 percent over the next twelve months. It is therefore not expected that the calculated gap of 20 percent will close quickly. If the yuan were to actually appreciate, this would mean more expensive Chinese imports to the USA, which in turn would have an impact on all areas.
Investors could benefit from investments in China stocks, as they will receive a tailwind from an appreciation of the yuan, according to CryptoBriefing. Yields denominated in yuan would be converted into more U.S. dollars when converted back. A stronger yuan also means that profits made in China are worth more in US dollar terms for US companies that generate sales there.
Furthermore, Goldman Sachs comes to the conclusion that the US dollar is also overvalued compared to other currency pairs. If there is a general cycle of devaluation of the greenback, this could further reinforce the yuan’s gains.
Martina Köhler, editorial team at finanzen.net
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