The Chinese yuan, which has weakened by around 5 percent against the U.S. dollar this year, will likely stabilize on a slightly stronger footing than current levels, from now until the end of the year, according to Europe's largest bank HSBC.
The Chinese currency is expected to hit 6.7 yuan per U.S. dollar by the end of the year, the bank said. That's around 2 percent stronger from Wednesday's close and would represent a 2.98 percent decline for the whole year.
"Currently the market is very much driven by negative sentiment induced by concerns about trade tensions ... We think that the market is currently projecting a pretty pessimistic scenario," Fan Cheuk Wan, head of investment strategy and advisory for Asia at HSBC Private Bank, told CNBC's "Squawk Box" on Thursday.
HSBC is not the only bank that has said investors may have overreacted in selling down Chinese shares and currency. But its view on the yuan contrasts with many analysts including those from J.P. Morgan, UBS and ING, which said the currency's outlook remains uncertain given escalating trade tensions with the U.S. and China's own economic challenges.
ING, for one, said it expects the Chinese currency to weaken to 7 yuan per U.S. dollar by year-end — a level not seen in more than 10 years.
In a bid to stabilize the yuan, the People's Bank of China last week imposed a new rule asking banks to set aside reserves equivalent to 20 percent of their sales, making it more expensive for investors to bet that the currency would weaken. Fan said the PBOC's move will help to lift sentiment.
Worries about capital outflows have also not materialized because foreign investors are still buying Chinese shares and bonds, Fan said.
"Of course we'll need to take into account potential downside risks of further deterioration in the trade tensions," she said, adding that the escalation in the trade conflict with the U.S. actually gives China greater incentive to stimulate domestic demand for growth.
"Given that domestic demand contributes more than 90 percent of China's GDP growth, domestic demand growth would hold key to financial and economic stability in the second half of the year," she added.
Even if U.S. tariffs on $200 billion in Chinese goods are implemented, that's likely to shave just 0.4 percentage point off China's economic growth, Fan said.