Synopsis:

Goldman Sachs suggests shorting the Chinese Renminbi (CNY) against a CFETS basket of major currencies, citing a disconnect between the recent strengthening of CNY and underlying economic fundamentals in China.

Key Points:

1. Disconnect with Economic Fundamentals:

   • The strengthening of CNY appears increasingly disconnected from China's economic fundamentals.
   • While exports remain strong, domestic demand and consumer confidence are weak.
   • Property prices continue to decline with no signs of stabilization, and the People's Bank of China (PBoC) has unexpectedly cut policy rates.

2. Policy and Market Signals:

   • Policymakers do not seem to be actively pushing for further CNY strength, as indicated by the USD/CNY fixing remaining above 7.13 in recent weeks.
   • Counter-cyclical factors have also narrowed sharply, further supporting the case for CNY depreciation.

3. GS Recommendation:

   • Goldman Sachs recommends shorting CNY against the CFETS basket with the following weights: USD 40%, EUR 26%, KRW 13%, JPY 13%, and AUD 8%.
   • The entry point is 100, with a target of 94 and a stop-loss at 103.
   • This position offers an annualized carry of +1.4%.

4. Hedging US Election and Tariff Risks:

   • The recent unwinding of CNY provides better levels to hedge against US election and tariff risks, which, although not currently in focus, are expected to resurface in the near future.

Conclusion:

Goldman Sachs recommends a short position on CNY against a CFETS currency basket, anticipating a resumption of gradual CNY depreciation amid weakening economic fundamentals in China and cautious policy signals from the PBoC.