China: Renminbi to depreciate meaningfully further in 2017 – Goldman Sachs

According to the analysts at Goldman Sachs, for 2017, they forecast the USDCNY fix at 7.30 at yearend, which incorporates their global FX team’s view of further broad USD appreciation (particularly against the euro and yen) as well as some mild depreciation against the (new) CFETS basket.

Key Quotes

“As for the dollar, markets are still underpricing our US team’s expectation of three Fed rate hikes in 2017, suggesting the possibility of more upside from higher rate differentials versus the rest of the world. Although not our base-case forecast, there is also a real possibility of tax and tariff policies from the new administration that could push the dollar significantly stronger, in particular the discussion of a “border-adjusted” tax regime.”

“From a trade-weighted currency perspective the risks look more two-sided.  On the one hand, stronger recent growth and the potential for upside inflation risks in China suggest authorities should be comfortable in the near term with a steady or even slightly appreciating currency on a trade-weighted basis.”

“Indeed, the CNY TWI has appreciated slightly since mid-2016.  To the extent this approach to currency management helps stabilize expectations, it might also help moderate capital outflow pressures to some degree.  On the other hand, a high level of stimulus has already been needed to keep real GDP growth at mid-6% levels, and we think that will continue to be true in 2017, suggesting that policymakers still may lean in the direction of a slightly weaker currency if there are any signs of growth softness as the year progresses.”