Goldman Sees Limited Gains in Yuan Even After Partial Trade Deal

(Bloomberg) -- In the absence of a broader deal that rolls back existing tariffs, Goldman Sachs Group Inc. says the offshore yuan is unlikely to strengthen much further.

If the U.S. and China can build on the progress in talks last week, culminating in a summit meeting between President Donald Trump and his counterpart Xi Jinping, that will likely keep emerging-market currencies supported, strategists including New York-based Zach Pandl wrote in a report. But the onshore fix and offshore yuan, which strengthened last week, are almost aligned, they wrote.

“Short-lived pauses in trade tensions have in the past given way to renewed escalation rather than a roll-back of the trade war,” the strategists said. “If anything, disagreements have spread to more dimensions -- technology, financial flows, immigration and foreign policy -- such that finding ramps to de-escalate is even harder.”

Goldman still expects the yuan to weaken to 7.20 per dollar in three and six months, before recovering to 7.10 in 12 months.

Here are Goldman’s views on the Turkish lira and Brazilian real:

• Turkey’s offensive in northern Syria has heightened the risk of U.S. sanctions and contributed to the lira’s weakness, and its “real rate buffer remains thin” relative to its history and other emerging-market peers
  • It’s also increasingly clear that achieving strong growth is once again the main priority, and will likely be accompanied by further monetary easing and fiscal and credit expansion
  • Goldman still sees the lira weakening to 6.25 per dollar in three months
  • The currency fell to 5.8833 per dollar on Friday.
• Brazil’s central bank will probably cut interest rates by another 50 basis points in October, as inflation slows
  • “With levels of real carry in Brazil low in both absolute and relative terms, and limited room for further downside in core rates, Brazil’s cutting cycle is a first-order risk” to the currency’s strength
  • Goldman had recommended staying long the real, funded out of the Chilean peso. It tightened stops last week and will be closely monitoring the trade
  • The risks to long positions in the real have increased and positive news on U.S.-China relations have decreased some pressures on the Chilean peso

To contact the reporter on this story: Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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