Morgan Stanley has adjusted its projection for the USD/yuan exchange rate to 7.35 by mid-2025, down from 7.50. They also anticipate the rate to reach 7.50 by the end of this year, revised from 7.60.
This change follows an upgraded outlook on Chinese equities, underlining the role of currency strength for market performance, particularly in offshore markets. A stable or strengthening yuan is viewed favorably by foreign investors who typically finance their positions in U.S. dollars, impacting asset allocation into China.
Revised Forecast And Market Sentiment
Their revised forecast suggests a more measured weakening of the yuan than initially expected. By adjusting their year-end target downward, they acknowledge improved investor sentiment towards Chinese markets. Confidence in equities often translates to a firmer currency as capital inflows increase.
A rising yuan eases concerns for those with exposure to Chinese assets. Foreign participants, especially those leveraging U.S. dollar funding, are directly affected by currency moves. A weaker yuan erodes returns when converted back into dollars, while a stable or strengthening currency can make Chinese investments more attractive.
Morgan Stanley’s adjustment aligns with their improved stance on Chinese equities. When expectations for stock performance improve, upward pressure on the local currency follows. This is particularly relevant for offshore-listed Chinese companies, where dollar-based investors regularly assess currency movement before committing capital.
The projection also suggests confidence in steadier macroeconomic conditions. Persistent depreciation can drive capital flight, raising risks for both domestic and foreign investors. By revising their view, they indicate a belief that policymakers will maintain stability, avoiding disorderly declines in the exchange rate.
Implications For Global Investors
We recognise how currency shifts feed into broader market positioning. Foreign investors don’t just look at equity upside; they manage currency risks that could erode gains. As the yuan holds its ground, hesitations tied to depreciation concerns may ease, creating a more constructive setting for international allocations.
For those managing exposure, these adjustments carry weight. Every revision in exchange rate forecasts hints at underlying expectations for monetary policy, capital flows, and risk sentiment. Keeping a close eye on whether these projections hold will be essential in the coming weeks.
