Goldman Sachs has adjusted its forecast for China’s yuan exchange rate. The bank anticipates USD/CNY will fall to 7.20 in the next three months, 7.10 in six months, and will reach 7 over the coming year.

The bank suggests China’s exports will stay robust due to the currency’s undervaluation on a real trade-weighted basis, particularly compared to the dollar. These undervalued levels could lead to a stronger onshore yuan, potentially offsetting tariff reductions.

Forecast Update Reported

This forecast update was reported in a Bloomberg article referencing a Goldman Sachs note from last Friday.

What Goldman have done here is revise how they see the yuan moving against the dollar over the coming months. They now expect it to strengthen steadily, from where it is today, down to 7.20 in three months’ time, then 7.10 in six months, and finally settling at 7.00 over the course of the year. This is not a wholesale shift in thinking; it’s more like a fine-tuning of their expectations based on recent trade dynamics and economic indicators.

They’re making this call because they believe the yuan is trading too cheaply when you look at it through the lens of a trade-weighted index. That kind of measurement compares the yuan not just to the dollar but to a basket of other currencies used in China’s global trade. By that reading, the currency is still undervalued, so any sustained strength in exports—especially if global demand holds—could give the yuan room to climb. It’s a relatively mechanical relationship: strong exports mean steady demand for the currency, and that pushes it up.

Short Term Positioning

Now, what we need to consider is what this means for short-term positioning. If this view holds water, there’s a clear signal for the pricing of yuan-related derivatives. Anything structured on future expectations of depreciation might see repricing pressure. For example, implied volatility on USD/CNY could be moving too high if the currency’s appreciation path turns out to be smoother than some assume. Calendar spreads where the forward curve bakes in too much pessimism could begin to unwind.

In our view, the trade-weighted comment hints that the pressure isn’t necessarily coming from inside China—capital flight, policy missteps, or anything of the sort—but rather from a stubbornly strong dollar and weak peers. If the dollar starts to give ground, the mechanics around the yuan shift quickly. We’d likely see fewer intervention whispers and more organic moves in one direction. That should affect not just directional trades but also carry models and negative carry trades that rely on yuan stability to hold ground.

A possible readjustment of hedging strategies might now be on the table too. Forwards priced off short-term depreciation assumptions may be misaligned against the momentum Goldman sees building. This doesn’t mean abandoning protection entirely, but it does suggest running a fresh sensitivity check on exposure, particularly where non-deliverable forwards are concerned.

Tariffs were also mentioned, but almost in passing. That makes sense—the point seems to be that even if external pressure from tariffs fades, the internal strength of the currency could still take hold. In that case, policy fine-tuning by the central bank becomes less disruptive, and the exchange rate trades with more reflectiveness of trade demand and flow imbalances, not policy shadows.

One ought to watch how the short-end of the curve responds. If there’s appetite for yuan-denominated assets and reserves continue to hold, then front-month contracts could begin to show some narrowing. We would also keep an eye on option skew. If traders start expecting fewer topside emergencies, you might see lower demand for protection above 7.30 or so, making those calls cheaper.

It’s not a vacuum though—this view sets up a clear framework for divergence. If the broader macro narrative sours, especially with the Fed dragging its feet on rate cuts, this expected appreciation might stall. But if things hold, or if the dollar softens enough, as we suspect could be the case, the valuation gap Goldman referenced won’t last indefinitely.

Ultimately, the line they’re drawing is not about policy announcements or shock events—it’s about how pricing may have drifted too far from fundamentals. That’s not usually exciting at first glance, but in FX derivatives, it’s often where the steadier money is made.

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