Currencies

This is what Goldman thinks about the Chinese yuan

Here's why Beijing is guiding the yuan higher
VIDEO3:3603:36
Here's why Beijing is guiding the yuan higher

China's currency has already dropped quite a bit in the new year, but the yuan is still headed "meaningfully" lower this year, Goldman Sachs said.

The dollar will be fetching 7.0 yuan by year-end, up from 6.5807 currently, Goldman Sachs forecast in a note Monday.

That "reflects the combination of a view that Chinese policymakers are likely to be comfortable with modest (our forecast implies about 2.5 percent) depreciation against the CFETS (China Foreign Exchange Trade System) basket, and that the U.S. dollar is likely to appreciate further against other currencies in 2016," Goldman said.

The , as the yuan is also known, has already sparked consternation so far in 2016.

Last week, policy makers at the central bank, the People's Bank of China (PBOC), tinkered again with the currency without providing much indication to the market about its endgame -- one factor in the China market selloff that spurred a global stock rout.

People walk past a panel displaying China stock market indexes, which were down more than seven percent and were suspended for the rest of the day, for the second time this week, in Hong Kong, China January 7, 2016.
One big market casualty: China regulators' reputation

On Thursday, the PBOC allowed the yuan to fall by the most in five months to the lowest fixing since 2011.

But the PBOC is also suspected of intervening several times last week, including Friday, to slow the renminbi's decline.

On Monday, the PBOC set the yuan's reference rate against the dollar at 6.5626, suggesting a slightly stronger Chinese currency based on Friday's fixing of 6.5636.

China's central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar, relative to the official fixing rate.

"Policymakers appeared to be trying to rein in depreciation expectations with a stronger-than-expected fix (Friday)," Goldman said.

"Ultimately, however, we think the renminbi will depreciate further, given cyclical weakness in the economy and an apparent shift in the reaction function to allow more movement."

Data on the mainland's foreign reserves, released Thursday, also showed the biggest annual drop on record in 2015, suggesting that the central bank has sold dollars to support the yuan.

That could suggest further weakness for the Chinese currency ahead, Jonathan Cavenagh, head of emerging Asia foreign-exchange strategy at JPMorgan, told CNBC Monday. JPMorgan expects the yuan to fall to 6.9 against the dollar by year-end.

"We're continuing to expect capital outflows to continue this year," Cavenagh said. "At some stage, they're probably going to have to let the currency go and weaken more and intervene less in order to stabilize that FX reserve situation. "

"In the near term, we'll probably see a bit of consolidation in terms of the yuan trend, but the medium-term trend is still very much down in our view," Cavenagh said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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