Goldman Sachs says yuan 20% undervalued, lifts forecasts to 6.50 in a year

⦿ Executive Snapshot

What: Goldman Sachs has declared the Chinese yuan to be more than 20% undervalued against the US dollar and has significantly upgraded its forecasts for the currency.
Who: Goldman Sachs, JPMorgan Asset Management, Chinese exporters, People's Bank of China.
Why it matters: The structural undervaluation and forecasted appreciation of the yuan could have significant implications for capital flows, trade dynamics, and commodity markets globally.

Goldman Sachs upgraded its yuan forecasts to 6.80 in three months, 6.70 in six months, and 6.50 in a year, from prior targets of 6.85, 6.80, and 6.70 respectively.
The yuan is currently trading around 6.80, near its strongest level against the dollar since early 2023, supported by improving US-China relations and broader dollar weakness.
China's external surplus is approaching unprecedented levels as a share of global GDP, reflecting deep export competitiveness and a structurally undervalued currency.
JPMorgan Asset Management also predicts further yuan gains, suggesting a productive Trump-Xi summit could act as a catalyst pushing the currency to 6.50.
Recent daily fixings from the People's Bank of China show a firmer tone, indicating policymakers are not resisting the move higher, while exporter conversion ratios are rising.

The yuan's undervaluation and the subsequent forecasted appreciation are viewed as driven by structural economic forces, rather than relying solely on temporary diplomatic developments.
The current geopolitical engagement between Washington and Beijing adds a layer of complexity, as positive outcomes from trade discussions could further influence market perceptions and currency dynamics.

The immediate consequence of the yuan's appreciation could lead to accelerated capital inflows into yuan-denominated assets, exerting sustained pressure on the US dollar during Asian trading sessions.
Long-term, a stronger yuan could enhance Chinese purchasing power for dollar-priced imports, potentially impacting commodity markets positively, particularly for crude oil and industrial metals.

Potential risks include regulatory or monetary policy shifts from the People's Bank of China that could alter the trajectory of yuan appreciation.
Competition from other currencies and the dependency on ongoing geopolitical relations could also hinder the yuan's upward momentum.

The outcome of the Trump-Xi summit will be closely monitored as a potential near-term catalyst for yuan strength.
Further signals of success or failure will include shifts in exporter conversion ratios and any changes in the People's Bank of China's daily fixings, which could indicate policy direction.