The renminbi fell to a seven-month low, and interest rate differentials between China and the United States are expected to peak

Financial Mayflower

2024-06-11 20:46Published on the official account of the financial group of Shanghai Caijing magazine

Summary

At 17:30 Beijing time, the spot exchange rate of the onshore yuan against the US dollar was at 7.2544, the lowest intraday hit 7.2545, down 1.4% from seven months ago

Text: Kang Kai, Tang County

Editor|Zhang Wei

On June 11, as the U.S. dollar index rose sharply overnight, the onshore renminbi crossed the 7.25 mark against the U.S. dollar and fell to a new seven-month low.

At 17:30 Beijing time, the spot exchange rate of the onshore yuan against the US dollar was 7.2544, the lowest intraday touched 7.2545, down 1.4% from seven months ago.

This continues the pressure on the renminbi in recent months. Since November 2023, the RMB has fallen all the way from 7.1655 to 7.2 and 7.25 in anticipation of the Fed's continuous postponement of interest rate cuts.

Behind this is the sharp rise in the dollar index and the collective decline of non-US currencies. As of June 11, the dollar index was at 105.17. The USDEUR hovered near a one-month high, and the USDJPY hit a one-week high.

Behind this, regulators such as the People's Bank of China (PBOC) have mostly taken measures to support the local currency. On June 11, the central parity of the RMB against the US dollar was quoted at 7.1135, and the deviation from the Reuters forecast widened to nearly 1,600 points, indicating that the regulator still supports the RMB exchange rate to stabilize market expectations.

Sun Wu, chief financial market analyst of Mitsubishi UFJ Bank (China) Co., Ltd., believes that in May, the U.S. non-farm payrolls data was stronger than expected, which shook the market's expectations for the Fed's recent interest rate cuts, and the U.S. Treasury bond yields rose significantly, and the interest rate gap between China and the United States widened again, so the yuan was under some pressure. However, this may be partly due to seasonal factors. In the future, the Fed will continue to pay attention to economic data to determine the best time to cut interest rates.

Xing Zhaopeng, senior China strategist at ANZ Bank, believes that in the next step, the RMB is expected to fluctuate in the range of 7.25-7.30, and the specific direction will wait for the signals of overseas central banks to be clearer. From the perspective of market pricing, after the European Central Bank cuts interest rates, the market's bets on the Fed will further increase, and the RMB exchange rate will not depreciate in one direction.

Fed rate cut expectations postponed

In Xing Zhaopeng's view, one of the main factors why the RMB exchange rate against the US dollar fell below the 7.25 mark is that the US dollar index is strong. Stronger-than-expected U.S. non-farm payrolls data highlighted the resilience of the U.S. labor market, which delayed bets on a Fed rate cut.

In May, the U.S. added 272,000 nonfarm payrolls, far exceeding market expectations of 190,000 and up from 165,000 in April. Average hourly earnings rose 4.1% year-on-year and 0.4% month-on-month in May, both beating previous expectations.

Against this backdrop, the market has reduced the likelihood that the Fed will start cutting interest rates in September. Currently, the market is betting on a 50% probability that the Fed will cut rates by at least 25 basis points at its September meeting, down from nearly 60% a week ago, according to CME's FedWatch tool.

As of 16:00 on June 11, the U.S. dollar index was at 105.17, up 0.5% from the beginning of June. At the same time, Treasury yields rose significantly, with the 10-year yield back around 4.45%. Interest rate differentials between China and the United States widened again.

"On the other hand, the far-right won the European Parliament elections, weakening the euro. With the euro accounting for more than 60% of the dollar index's weighting, this pushed the dollar index higher. At the same time, global risk sentiment has strengthened as a result, which in turn has contributed to currency strength. Xing Zhaopeng further said.

In addition, Ming Ming, chief economist of CITIC Securities, said that compared with the United States, the trend of inflation cooling in the euro area is relatively clear. The European Central Bank has started to cut interest rates before the Fed. From this point of view, the U.S. dollar index may still maintain a strong operation.

On the evening of June 9, local time, voting ended in the European Parliament election. Preliminary vote counts show an increase in seats for right-wing and far-right forces, with ruling parties in some large European countries, such as France and Germany, underperforming far-right parties. This shows that the political spectrum in Europe is shifting to the right, with far-right parties leaning towards leaving their countries "Brexit", which is not conducive to political stability in the region.

On June 10, European stocks and bonds fell three times, the French stock market plummeted, and the euro fell to its lowest level against the dollar in a month.

The strengthening of the U.S. dollar index weighed on non-U.S. currencies. Since the second quarter, due to the frequent recurrence of the Fed's interest rate cut expectations, the dollar index has risen several times, and many Asian currencies have fallen sharply.

In the view of Wu Dan, a researcher at the Bank of China Research Institute, in the Asia-Pacific market, the exchange rate of many countries such as the yen has fallen below the historical average, but the RMB exchange rate has always remained basically stable in the range of about 7.1-7.25. To some extent, the renminbi plays the role of the "ballast stone" of Asian currencies.

"This is mainly due to the fact that China's cross-border capital flows have been reasonable and orderly since the beginning of this year, the recovery of trade data has led to an increase in capital inflows under the current account, and foreign investors have continued to increase their holdings of RMB bonds, driving the return of short-term capital under the capital financial account. In addition, China's foreign exchange reserves are stable and abundant, and the balance of payments is basically balanced, which provides strong support for the stability of the RMB exchange rate. She explained.

Interest rate differentials between China and the United States are expected to converge

Looking ahead, a number of analysts said that the pace of the Fed's interest rate cuts and the monetary policy of the People's Bank of China will be the key factors affecting the interest rate differential between China and the United States, which will affect the RMB exchange rate.

Xing Zhaopeng expects the RMB exchange rate to fluctuate in the range of 7.25-7.30, and specific guidance will wait for clearer signals from overseas central banks. After the ECB cuts interest rates, the market's bets on the Fed will further increase, and the RMB exchange rate will not depreciate in one direction.

"Judging from the current situation, the Fed is not far off to cut interest rates, and the interest rate differential between China and the United States is expected to converge. Judging from the current performance, the market has not formed a unilateral expectation of the RMB exchange rate, but has taken advantage of the trend according to the changes in the situation, buying and selling with the rise and fall of the broader market. Zhou Hao, chief economist of Guotai Junan International, also said.

Inflation and employment are the two main goals of the Fed's monetary policy. In Sun Wu's view, both of these support the Fed's future interest rate cuts. After the Fed cut interest rates, the yuan may usher in a chance to test below 7.20.

He said that in the first quarter, the contribution of personal consumption expenditures to the real gross domestic product (GDP) of the United States was 0.90 percentage points lower than the average of the third and fourth quarters of 2023. This means that the year-on-year growth rate of core CPI, which the Fed is concerned about, will slow down further. In addition, for manufacturing, one of the most hiring sectors in the United States, hiring has been more volatile since April 2023, which may indicate that the impact of the Fed's interest rate hikes on demand is starting to expand.

In terms of China's monetary policy, Zhou Hao believes that in the second half of the year, the general direction of the central bank's monetary policy will remain unchanged.

"As major overseas economies gradually embark on the path of interest rate cuts, the domestic monetary policy space may gradually open, and it is expected that the policy interest rate will be lowered, the deposit rate will fall, and the loan prime rate (LPR) will continue to decline under the cost reduction and credit easing target." Ming Ming also said.

Against the backdrop of pressure on the RMB exchange rate, China's central bank is facing a dilemma. If the exchange rate is maintained, interest rate cuts need to be postponed, which will affect the economic recovery. If the low interest rate environment is maintained, it will be negative for the exchange rate.

Behind this, most of the regulators such as the People's Bank of China have taken measures to support the local currency. In the onshore market, the People's Bank of China (PBOC) has increased dollar liquidity by directing major banks to sell dollars. In the offshore market, China's central bank and the Ministry of Finance tightened RMB liquidity through the issuance of offshore central bills and treasury bonds. At present, the cost of funds to bet on a further decline in the CNH has risen sharply, with the one-year implied interest rate cost of the CNH reaching 2.6% and only 1.1% onshore.

On June 11, the deviation between the central parity of the RMB and the Reuters forecast widened to nearly 1,600 points, indicating that the regulator is still stabilizing exchange rate market expectations.

"The coordination of exchange rate policy and monetary policy, in the end, who is in charge and who is auxiliary, there is no painless choice, there are advantages and disadvantages." At the recent China Macroeconomic Forum seminar, Guan Tao, global chief economist of Bank of China Securities, reminded that the U.S. economy may be better than imagined, or it may be running on the edge of the cliff. ”

(The author is a reporter from Caijing)

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