(Bloomberg) — Morgan Stanley sees room for the yuan to climb further, but disagrees with more bullish views that the currency is significantly undervalued.
The Chinese yuan may advance to 6.70 against the dollar in the near term, supported by stronger growth and improving risk sentiment, according to the bank’s latest forecasts. It also raised its year-end expectations to 6.75 from 7 previously, bringing it more in line with the Bloomberg consensus.
Still, the bank argues that much of the rally may already have played out. The CFETS index — which tracks the yuan against a basket of trading partners — has returned to levels in line with recent years, suggesting the “catch-up” phase after earlier weakness is over, according to chief China economist Robin Xing.
“Significant proactive appreciation against the basket is unlikely,” Xing said in emailed comments to Bloomberg News on Wednesday. “I believe the yuan is not significantly undervalued.”
That view contrasts with a more bullish camp including Goldman Sachs Group Inc., which estimates the yuan is more than 20% undervalued and expects it to strengthen to around 6.5 over the coming year. Others forecasting further gains include JPMorgan Asset Management, Eurizon SLJ Capital’s chief investment officer Stephen Jen, and Hao Hong, chief investment officer at hedge fund Lotus Asset Management. The onshore yuan was little changed at 6.7923 Wednesday.
The Chinese currency has risen almost 6% against the dollar in the past year, making it one of Asia’s best-performing currencies. Both onshore and offshore rates climbed past the closely watched 6.8 per dollar level this week to their strongest since early 2023. The gains come ahead of a summit between Presidents Donald Trump and Xi Jinping in Beijing this week, which traders say could help sustain the trade detente supporting stocks and the yuan.
The differing views come down to how investors interpret China’s policy priorities. Bulls highlight strong exports, persistent trade surpluses and improving investor sentiment as reasons the yuan could keep strengthening. Those more cautious say Beijing has little incentive to push for broad-based currency gains with domestic demand still uneven and external risks lingering.
Market pricing shows traders are now paying slightly more to hedge against yuan strength than they are against weakness. The so-called one-week risk reversals for the offshore yuan-dollar currency pair have fallen below zero to trade near the lowest since January, according to data compiled by Bloomberg.
Even then, Morgan Stanley said the People’s Bank of China is likely to remain wary of soft domestic prices, and is unlikely to use currency strength to address growth imbalances. This means that dollar-yuan would remain more of a function of broader greenback moves, it said in a report dated May 12.
–With assistance from Shulun Huang, Chongjing Li, Karen Zhou and Shikhar Balwani.
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