The Yuan as a High-Conviction Currency Trade in 2026: Why Goldman's 25% Undervaluation Thesis Signals a Strategic Buy Opportunity

Goldman Sachs has positioned the Chinese yuan (CNY) as one of its "highest conviction" foreign exchange (FX) calls for 2026, asserting that the currency is 25% undervalued relative to its fair value. This bold thesis, rooted in a combination of structural economic fundamentals and macroeconomic tailwinds, presents a compelling case for investors seeking asymmetric upside in a global landscape marked by divergent growth trajectories and policy shifts. Let's break down the logic behind this call and why it could represent a strategic buy opportunity.

1. Valuation Models: GSDEER and GSFEER Reveal a Mispriced Yuan

Goldman Sachs employs two proprietary models-GSDEER (Dynamic Equilibrium Exchange Rate) and GSFEER (Fundamental Effective Exchange Rate)-to assess currency valuations. According to these models, the yuan is significantly undervalued:
- The GSDEER model estimates the yuan's fair value near 5.00 USD/CNY, implying a 30% undervaluation against the dollar according to analysis.
- The GSFEER model, which links the yuan's value to the current account, shows the currency to be 12% undervalued according to analysis.
- A weighted average of both models suggests a 25% undervaluation according to analysis.

These models incorporate long-term fundamentals such as productivity differentials, terms of trade, and current account balances. For instance, China's high productivity relative to the U.S. and low inflation (compared to the 8 percentage point higher U.S. inflation over the same period) are critical inputs according to data. The yuan's real effective exchange rate is currently at its weakest level since 2012, reflecting a structural misalignment according to Reuters.

2. Current Account Surplus: A Structural Tailwind

China's current account surplus is a cornerstone of the yuan's undervaluation thesis. The International Monetary Fund (IMF) estimates that China's 2025 current account surplus reached 3.3% of GDP according to Goldman Sachs. Using elasticity assumptions, this implies an undervaluation of 18–30% according to Goldman Sachs. Goldman Sachs projects this surplus will widen further in 2026 due to strong export growth (5–6% annualized) and subdued domestic demand according to Reuters.

The surplus is driven by China's dominance in high-tech manufacturing and its ability to capture global market share despite U.S. tariffs. For example, China's goods trade surplus hit nearly $1 trillion in the first 10 months of 2025 according to Bloomberg. This external strength is a direct result of the yuan's undervaluation, which enhances export competitiveness while suppressing import costs.

3. Productivity and Inflation Differentials: A Double-Edged Sword

China's productivity growth has outpaced the U.S. in recent years, a factor embedded in the GSDEER model. Meanwhile, deflationary pressures in China (flat or falling domestic prices since 2023) contrast sharply with modest inflation in its trading partners. This divergence creates a real competitiveness gain for China, further justifying the yuan's undervaluation according to Goldman Sachs analysis.

For context, the U.S. Core PCE inflation is projected to fall to 2.3% by year-end 2026 according to Goldman Sachs, but China's deflationary environment has already provided a head start in this normalization. The result is a yuan that is fundamentally mispriced relative to its economic reality.

4. Macroeconomic Tailwinds: Trade Tensions and Policy Divergence

The yuan's undervaluation is also supported by geopolitical and policy dynamics:
- U.S.-China trade relations have stabilized post-2025, with tariffs settling at lower levels than initially feared. However, decoupling remains a dominant theme, limiting the yuan's appreciation potential in the short term according to Goldman Sachs.
- The People's Bank of China (PBOC) has prioritized currency stability over aggressive monetary easing, maintaining a managed float system. This policy stance has kept the yuan's central trading point fixed around 7.1 since 2022, despite structural pressures for appreciation according to TradingView.
- Global government debt has surpassed $100 trillion, heightening sensitivity to fiscal risks. In this environment, the yuan's undervaluation offers a hedge against dollar overvaluation according to Goldman Sachs analysis.

5. Strategic Buy Opportunity: Timing the Appreciation

Goldman Sachs forecasts a gradual appreciation of the yuan in 2026, with USD/CNY expected to trade in a 6.90–7.30 range according to Reuters. By year-end, the firm projects the yuan could reach 6.70–6.80, driven by:
- Narrowing U.S.-China yield differentials as the Fed cuts rates.
- Structural reforms in China's manufacturing and technology sectors.
- Repatriation flows from exporters, which could accelerate yuan appreciation near year-end according to EFX Data.

For investors, this represents a low-volatility, high-conviction trade. A 25% re-rating of the yuan from its current level (7.06 as of November 2025) would translate to a ~30% return for those long CNY. Moreover, the yuan's undervaluation is comparable to the mid-2000s "China shock" period, which was followed by a significant appreciation phase according to Investing.com.

Conclusion: A Mispriced Currency in a Divergent World

Goldman Sachs' 25% undervaluation thesis for the yuan is underpinned by a robust framework of structural economic fundamentals, policy dynamics, and global macroeconomic shifts. While the PBOC's managed float system may delay immediate revaluation, the long-term case for appreciation is compelling. For investors with a 2026 horizon, the yuan offers a rare combination of asymmetric upside, diversification benefits, and strategic alignment with China's growth trajectory.

As the world grapples with divergent growth paths and fiscal pressures, the yuan's undervaluation is not just a technical anomaly-it's a strategic opportunity waiting to be realized.