Yuan May Hit Five Per Dollar on Carry-Trade Exit, Macquarie Says

China’s onshore currency may strengthen to as much as five yuan per dollar if local firms unwind a massive buildup of greenback holdings, triggering a sharp reversal in capital flows, according to Macquarie Group.

As long as domestic demand stays weak and exports remain resilient, any yuan appreciation is likely to reflect broad dollar weakness rather than stronger Chinese fundamentals, economists led by Larry Hu wrote in a note. But if exports falter and Beijing ramps up stimulus, an unwinding of yuan carry trades may trigger a sharp rally, potentially pushing the exchange rate to six or even five, they said.

Macquarie estimates Chinese firms have amassed about $800 billion in dollar positions, largely through carry trades, in which investors borrow in low-yielding currencies and invest in higher-yielding assets elsewhere. A reversal of those trades would mark a shift in the yuan from a currency driven mainly by dollar movements to one supported by domestic factors, with implications for China’s economy and assets.

The call comes as Chinese companies have accelerated foreign-exchange conversions since late last year, helping the yuan strengthen past the seven-per-dollar level . The currency has also outperformed its Asian peers over the past three months despite broader dollar strength amid tensions in the Middle East.

“If China’s domestic demand strengthens on the back of forceful stimulus, the yuan carry trade will start to unwind as business confidence improves and the US-China yield gap narrows,” the economists wrote. “This would allow the yuan to appreciate more forcefully against the dollar.”