Global investment banks are revising up their forecasts for the Chinese yuan, betting that its recent rally will be sustained due to persistent dollar softness and continued capital inflows.
The yuan touched a near 16-month peak around 6.81 against the U.S. dollar this week, recovering all the losses suffered during the coronavirus pandemic to stand about 2% stronger for the year so far.
Goldman Sachs said on Tuesday it saw downside risks to its 12-month forecast for the dollar to be at 6.7 yuan. HSBC said it now expects the yuan to be at 6.7 per dollar by the end of this year, stronger that its previous forecast of 6.95.
Other banks including Union Bancaire Privee, Westpac and SEB have also revised their forecasts for the yuan in the past week, all favoring the Chinese currency to strengthen.
Economists at Goldman Sachs said that even though the currency remained sensitive to trade disputes between China and the United States, their trade deal would not break down this year.
Traders and analysts said the People's Bank of China (PBOC) has also not been using its counter-cyclical factor to contain the yuan, signaling tacit official approval for the appreciation.
The trade-weighted basket against which the yuan is managed has also gained more than 1% in two weeks, implying the yuan’s moves are not merely a reflection of the dollar’s weakness.
Ju Wang, senior FX strategist at HSBC, said the PBOC would tolerate further rises in the yuan as it is keen to promote yuan internationalization among Chinese corporates and their foreign counterparties. Foreign investment inflows and a widening current account surplus were among factors driving the yuan, Wang said.
Market participants also see a high probability that Chinese government bonds will be included in FTSE Russell's benchmark bond index later this month. Standard Chartered Bank said it expects inflows of 800 billion yuan ($117.21 billion) to one trillion yuan into mainland bond markets this year, and bigger flows of about 1-1.2 trillion yuan in 2021.
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