LONDON (Reuters) – Joe Biden will be the next U.S. president but for the $6.6 trillion-a-day currency trading world, the undisputed victor is China’s yuan, as investors bet trade tensions with Washington will recede and Beijing will let its exchange rate rise.

Major investment banks have rushed to upgrade their forecasts, predicting the yuan could hit the highs of early-2018, touched before current U.S. President Donald Trump escalated his tit-for-tat trade war.

The offshore-traded yuan rose 0.6% on Monday to a new 2-1/2-year high of 6.547 yuan per dollar, partly on weaker dollar positioning but also due to China’s containment of the coronavirus pandemic and an economic recovery.

Graphic: China’s yuan is on a charge –

On a trade-weighted basis, the yuan notched its highest since March.

Fears for the world’s mightiest export machine were soothed by data showing exports grew in October at the fastest pace in 19 months, even as the offshore yuan firmed for the fifth straight month in October.

Graphic: China exports and yuan –

“We used to obsess about 7-per-dollar. I wouldn’t be surprised if we break below 6 over the next 12 months,” said Savvas Savouri, chief economist at Toscafund Asset Management.

Behind that reasoning is the belief that authorities will be less hands-on in holding down the yuan, given exports’ declining share of the economy — World Bank data shows exports comprised 18.4% of GDP last year, versus 27% in 2010.

“You can argue the Chinese economy has been growing due to mercantilism at the expense of domestic consumption. That handbrake will be taken off,” Savvouri added.

Goldman Sachs, Morgan Stanley and Citi were among those advising buying the yuan against a fast-falling dollar. Goldman forecasts the yuan at 6.30 per dollar in the next 12 months — a 4% move from current levels.

Morgan Stanley named three reasons to go “long” yuan — China’s improved balance of payments position, a likely decline in trade tensions with Washington and dollar weakness.

Citi advised buying the yuan versus a euro/dollar basket.

Yuan bulls have also flocked to options.

The Depository Trust & Clearing Corporation reported more than $23 billion in trades last week on dollar ‘puts’ — options allowing holders to sell an asset — against yuan calls, which confer the right to buy at a pre-agreed price.

Strike prices — the level where options can be exercised — are mostly in the 6.5-6.35 per dollar region, DTCC data showed.

Chinese equities too saw one of the biggest daily investment inflows of 2020 the day after the election, according to the International Institute of Finance.

Graphic: CNH derivatives –

TOLERANT PBOC

The People’s Bank of China has been calm about recent yuan strength, although it appears to have tried slowing the appreciation via state banks’ dollar purchases.

Morgan Stanley reckons the trade-weighted yuan will be allowed to reach 98 from around 95.65 currently, as long as moves are “orderly and fundamentally driven”.

Economists note yuan strength, aside from increasing Chinese consumers’ purchasing power, will help lure more capital to its financial markets, playing into Beijing’s desire to boost the yuan’s global role.

It may not all be one-way though. Washington has long accused Beijing of keeping its currency artificially low, benefiting its exports at the expense of American goods. Those views may not disappear under a Biden presidency.

But the stance may be less volatile, especially if Beijing is seen as permitting some currency appreciation.

“The kind of more multilateral approach that we would expect Biden to take will obviously take time to come together,” said TS Lombard strategist Jon Harrison, who is backing a stronger yuan. “For China’s part, they will be happy to wait and see how the situation turns out.”