By William Watts, MarketWatch
With U.S.-China tensions on the rise, it’s no wonder that investors are keeping an eye on a weakening yuan, which has sparked global market turmoil before. More currency weakness may be in store, but analysts at Goldman Sachs don’t expect markets to be violently upended.
U.S. stocks were wavering between small gains and losses Monday after news reports said China had moved to pause purchases of U.S. soybeans and pork. That came after President Donald Trump on Friday downgraded relations with Hong Kong over China’s plan to impose new national-security laws that are seen undercutting the city-state’s autonomy.
“The specific policies [announced by Trump] were relatively narrow in scope, and we would not consider the steps a meaningful escalation. However, disputes between the two countries now cover a range of issues which seem unlikely to be resolved soon, and we expect legislation related to the delisting of Chinese firms to become law,” said Zach Pandl, a Goldman analyst, in a Monday note, referring to a bill that could require Chinese companies to delist from U.S. exchanges unless they certify they aren’t under the control of a foreign government.
Meanwhile, the Chinese currency rose 0.1% on Monday, with the U.S. dollar /zigman2/quotes/210561991/realtime/sampled USDCNY -0.1915% fetching 7.1278 yuan. The People’s Bank of China earlier set the midpoint of the trading range for the yuan in onshore trade at 7.1315 per dollar versus the previous fix of 7.1316, according to Reuters . The PBOC guides the onshore rate through the setting of the midpoint of its allowed daily trading range.
In offshore trade, the yuan changed hands at 7.1388 per dollar /zigman2/quotes/210561989/realtime/sampled USDCNH -0.0192% , according to FactSet, a decline of 0.1% against the U.S. currency.
A slide by the yuan that took the rate back above what had previously been termed by traders as a “line in the sand” at 7 per dollar triggered a bout of stock-market turmoil last August. An effective devaluation of the currency in 2015 was blamed for an intense round of global market volatility.
Goldman raised its USD/CNY forecasts to 7.25/7.15/7.00 for the 3-month/6-month/12-month horizons, respectively, from 7.15/7.05/6.90, previously.
Goldman also updated a number of its other forecasts for non-Japan Asia, or NJA, in line with its yuan revisions, but doesn’t “expect recent bilateral tensions to escalate to 2019 levels, with spillovers to markets well beyond NJA FX — but this remains a source of uncertainty for the broad dollar and a number of specific crosses,” Pandl wrote.