JPMorgan Lowers Yuan Call, Goldman Ups Yen Forecast on Trade War

(Bloomberg) -- The latest round of escalation in trade tensions between the U.S. and China has reshaped the immediate foreign-exchange outlook in the view of two Wall Street giants.

JPMorgan Chase & Co. now sees China letting the yuan sink through 7 per dollar, a level that's been a focus for the currency market since the trade war erupted last year. For Goldman Sachs Group Inc., the deteriorating trade picture means accelerated gains for the yen, which it now sees hitting a three-year high of 103 per dollar in three months.

• JPMorgan forecasts the yuan at 7.05 per dollar next month, against a previous call of 6.90 and Friday's close of 6.9420 in Shanghai. The bank projects a further drop to 7.10 by year-end and 7.15 by March.
• The yuan's depreciation will reverberate through Asia, according to JPMorgan. Declines by year-end are seen in South Korea's won to 1225 per dollar from about 1198 now, Singapore's dollar to 1.40 from about 1.3774, Indonesia's rupiah to 14,400 from about 14,185 now and India's rupee to 71 from about 69.60 now.
• Goldman kept its own yuan call unchanged at 7.05 in its three-month forecast. The bank is expecting renewed gains, however, to 6.95 in six months.
• Goldman's yen forecast of 103 per dollar in three months is up from 107 before. It kept its six-month projection at 105. The yen is now about 106.62 per dollar.

“Our baseline scenario had assumed prolonged trade negotiations with existing tariffs staying unchanged,” JPMorgan Chase & Co. analysts including Haibin Zhu in Hong Kong wrote in a note on Friday. “While the hope for a partial deal remains, the risk is biased towards further tariff increase and confrontation beyond trade areas.”

President Donald Trump's move to slap 10% tariffs on an additional $300 billion of Chinese imports will hurt China's growth and spur the People's Bank of China to take further steps to cushion the economy, Zhu and his colleagues wrote. Part of the response will be to let the yuan drop, they wrote. PBOC Governor Yi Gang in June emphasized that no specific level for the yuan was important, amid a focus among traders on the 7 level.

“The fallout from a breach of the 7.00 handle should be manageable,” given an improvement in China's external debt picture, according to the JPMorgan team. “Capital flow restrictions should also help contain domestic capital flight pressures.”

As for Goldman's new yen call, the bank had already been highlighting the value of the yen as a hedge in the trade war, given its long-standing haven attributes.

“But now with the U.S.-China trade war ratcheting up again, the case for more directional bullish yen positions has strengthened,” Goldman strategists led by Zach Pandl in New York wrote in a note on Friday. “The structure of Japan's balance of payments means that any drag from the trade war on cross-border foreign direct investment activity could be particularly important.”

While strong Japanese institutional demand for foreign bonds has helped to damp yen appreciation, Goldman's strategists highlighted the recent news that the country's government pension fund started to hedge overseas assets. That should limit the scope for portfolio outflows to “lean against” yen gains, the Goldman strategists wrote.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger

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