A gradual, policy-tolerated yuan appreciation would ripple through Asian FX, with currencies tied closely to China’s trade cycle likely to benefit from a firmer anchor in the region. A stronger yuan against the euro and dollar would ease some trade tensions but also squeeze margins for Chinese exporters, shifting the advantage toward companies focused on higher-value technology and domestic demand. For global investors, the expected currency gain adds a return kicker to Chinese assets, potentially drawing inflows into onshore bonds and equities. The main risk to the view is the dollar itself, which has been supported by geopolitical tension and sticky inflation, so a renewed Iran war-driven oil spike that keeps the Fed hawkish could slow the yuan’s ascent.---Goldman thinks the yuan is one of the most underpriced bets in currency markets, and that Beijing is quietly coming round to the idea of letting it climb.Summary:Goldman Sachs’ Kamakshya Trivedi said a stronger yuan is among the most underpriced scenarios in the global FX market, Bloomberg (gated) reportedHe described an estimated 20% to 25% undervaluation as conservative, saying it would look much bigger once China’s current account and external balances are consideredGoldman forecasts the yuan to strengthen to 6.40 per dollar in a year from around 6.69, with fair-value metrics pointing to a move below 7 being followed eventually by a six handleChina’s trade surplus topped $800 billion in the first eight months of the year, as Europe and other partners accuse Beijing of keeping its currency artificially weak, a charge Beijing rejectsTrivedi said Beijing may be growing more comfortable with appreciation to secure stable trade ties and support the yuan’s international roleThe yuan has hit a four-year high against the dollar and has risen more than 8% against the euro this yearA stronger Chinese yuan is one of the most underpriced outcomes in the global currency market, according to Goldman Sachs strategist Kamakshya Trivedi, who said investors are underestimating how far the currency could climb, Bloomberg reported.Trivedi, Goldman’s global head of foreign exchange, rates and emerging markets strategy research, said the bank estimates the yuan is undervalued by around 20% to 25%, a figure he described as conservative. He said the gap would look much larger once China’s current account and broader external balance were taken into account, and that the country’s swelling trade surplus strengthens the case for appreciation. Official data show the surplus stood at more than $800 billion in the first eight months of the year.Goldman expects the yuan to strengthen to 6.40 per dollar in a year’s time from around 6.69, and its fair-value models point to a level starting with a six as a future possibility, Trivedi told Bloomberg in an interview last week. The currency last traded near 6 per dollar in early 2014, amid heavy speculative inflows. Trivedi said he had been surprised that consensus forecasts and forward markets have still not caught up each time Goldman has moved its forecast stronger. In his view, the appreciation will be gradual but sustained.The call comes as China faces growing criticism from trading partners, including European nations, that it keeps its currency artificially weak to boost exports. Beijing rejects those claims, arguing that exchange-rate moves will not fix structural imbalances in the global economy and that its export strength reflects rising industrial competitiveness. Chinese authorities have nonetheless allowed the tightly managed currency to rise against most major peers, taking it to a four-year high against the dollar. It has gained more than 8% against the euro this year.Trivedi said Chinese policymakers may be growing more comfortable with further appreciation, partly because of the importance they place on stable trade relationships. China eased wider frictions with the European Union by agreeing to curb exports of hybrid vehicles after talks that ended on Friday. Beijing’s growing comfort also reflects an export sector increasingly driven by advanced manufacturing and technology, which is less dependent on a cheap currency.A stronger yuan would also fit with President Xi Jinping’s goal of building a powerful currency widely used in trade, investment and foreign exchange markets, with reserve status. Trivedi said modest, gradual but sustained appreciation serves that internationalisation aim and makes returns on Chinese assets more attractive. The pace of the dollar’s rebound, supported by geopolitical tensions and stubborn inflation, will be a key test of how quickly that path unfolds. This article was written by Eamonn Sheridan at investinglive.com.