Why China’s yuan is forecast to keep strengthening against the US dollar

Market optimism for the Chinese currency continues to rise, with analysts projecting the yuan to appreciate further against the US dollar amid a stronger-than-expected domestic economy and growing concerns over US debt sustainability.

On Tuesday, the People’s Bank of China set its daily reference rate at 7.1534 per US dollar – strengthening from Monday’s 7.1656, and the strongest level since early November.

In June, the onshore yuan appreciated by 0.41 per cent against the greenback, bringing its cumulative gains to 1.2 per cent for the second quarter and 1.86 per cent for the first half of the year.

“Compared to late April, onshore clients have turned less bearish on China’s near-term growth outlook, as macro data has been more resilient than previously feared so far this year, despite notable divergence between exports and domestic demand,” Goldman Sachs analyst Lisheng Wang wrote in a note on Sunday.

At the same time, investors have grown increasingly concerned about the sustainability of US government debt, expecting the dollar to further depreciate amid fading confidence in US exceptionalism, loose fiscal policies and rising long-term financing costs, Wang added.

The Wall Street investment bank forecasts the yuan to strengthen further, breaking the 7 per dollar level in six months and 6.9 in 12 months.