From a research note from Goldman Sachs just prior to the weekend:

  • Goldman's fundamental equilibrium exchange rate (FEER) model says the yuan is "close to fair value"
  • Yuan will "see only a modest depreciation against the dollar on a three-year horizon"
  • Says in 2005 and 2007, the yuan was substantially undervalued ... "needed appreciation of around 50%"
  • Since then the yuan is higher by about 46% in real trade-weighted terms
  • Now, though. "If anything, the latest mid-point still suggests modest undervaluation (10%)"
  • GS adds that currencies today are valued more based more on capital flows rather than trade data
  • GS expects China's substantial capital outflow in the last year (around $730 billion over the last five quarters) are likely to stabilize soon