UBS today provided an exchange rate forecast, predicting it will reach 7.5 by the first half of 2025. This forecast is based on continued trade tensions between the United States and China, along with a potential policy response from Beijing, including tariffs on select U.S. goods and restrictions on the export of critical materials.

According to UBS, while these measures may serve as symbolic acts of defiance, they are not expected to significantly impact the fundamental dynamics of the US-China relationship. Instead, a moderate depreciation of the Chinese yuan (CNY) is seen as a more viable approach to mitigating the economic impact of US tariffs. UBS believes that a gradual escalate in the USD/CNY exchange rate will assist ease the Chinese economy from trade pressures.

The financial institution also noted that a piercing depreciation of the yuan is unlikely due to the risk of triggering harmful capital outflows and competitive responses from China’s trading partners. Such a move could destabilize China’s financial system and is therefore considered unlikely.

On the other hand, UBS suggests that Beijing could potentially expand concessions to ease tensions, such as increasing purchases of agricultural products, liquefied natural gas (LNG) and services from the US. Moreover, cooperation on issues of mutual interest, such as combating drug trafficking, could also be part of China’s strategy to manage its convoluted trade relationship with the US.

The UBS forecast that the USD/CNY rate will reach 7.5 by the end of 2025 indicates China’s cautious approach to resolving trade disputes, balancing retaliation and gestures of cooperation to maintain economic stability and international relations.

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