The renminbi fell below 7.3, hitting a seven-and-a-half-month low

The depreciation is not unique to China, with Asian currencies falling to their lowest level in more than 19 months against the backdrop of high US interest rates. Among them, the yen fell to a 38-year low against the US dollar

Text: Kang Kai

Editor|Zhang Wei

The renminbi exchange rate continued to decline.

After trading on June 26, the offshore yuan fell below the 7.3 mark against the US dollar, following a seven-and-a-half-month low. On June 27, the offshore yuan opened lower at 7.3004.

At the same time, in early trading on June 27, the onshore RMB exchange rate against the US dollar continued to fall to 7.2665, also refreshing a new low in nearly seven and a half months.

This is a further continuation of the depreciation of the RMB exchange rate. On 11 June, the onshore renminbi crossed 7.25 against the US dollar and fell to a seven-month low. On the same day, the onshore yuan hit an intraday low of 7.2545 against the US dollar, down 1.4% from seven months ago.

In addition, the central parity of the RMB exchange rate also continued to weaken. As of June 27, the central parity of the RMB exchange rate has fallen for seven consecutive days, and it has also hit a low of more than seven months. On the day, the value was 7.1270.

The depreciation is not unique to China, with Asian currencies falling to their lowest level in more than 19 months against the backdrop of high US interest rates. Among them, the yen fell to a 38-year low against the US dollar.

Xing Zhaopeng, senior China strategist at ANZ Bank, believes that the dollar is stronger, and the renminbi as a low-interest currency is also facing an interest rate dilemma. The current RMB exchange rate is largely affected by the external environment. The prospect of the Fed cutting interest rates is uncertain, the eurozone is still likely to continue to cut interest rates, and the French parliamentary election is tilting to the right, so the dollar index continues to strengthen.

Zhang Jiantai, chief foreign exchange strategist at Mizuho Bank Asia, said that the central price of the RMB exchange rate fell for seven consecutive years, highlighting the rising tolerance of regulators for the orderly depreciation of the exchange rate, and the People's Bank of China (hereinafter referred to as the "People's Bank of China") may regard the low of 7.3503 yuan in September 2023 as the final bottom line in the future. China's economy is improving, which will provide support for the RMB exchange rate.

The median price fell for seven consecutive years

Xing Zhaopeng believes that the main factor for the depreciation of the renminbi exchange rate lies in the external side. Expectations of a Fed rate cut have been repeatedly postponed, pushing the dollar index higher. At the same time, in the European market, the eurozone is still likely to continue to cut interest rates, coupled with the rightward shift in the French parliamentary elections, which will continue to weaken the euro. Since the euro has the largest weight in the dollar index, this in turn pushes the dollar stronger.

On June 25, Fed Governor Bowman said that the Fed does not expect any interest rate cuts in 2024, and its rate cuts may be postponed until 2025. As a result, the dollar index rose to a high of 106.05 at the start of trading on June 27.

On 26 June, ECB Chief Economist Lien said the central bank expects more rate cuts over time.

The first round of voting in the French National Assembly election is about to take place, and the far-right party National Alliance has extended its lead. According to a Bloomberg poll, support for the National Alliance has risen to 35.4 per cent, while support for the Pan-Left Alliance has fallen to 28.1 per cent. In general, far-right parties tend to pursue Brexit policies to the detriment of the euro.

Amid the depreciation of the exchange rate, the central parity of the renminbi exchange rate also fell to a more than seven-month low. As of June 27, the central parity of the RMB exchange rate was reported at 7.1270, which has fallen for seven consecutive days, setting a record for the longest decline in a year.

The central parity of the RMB exchange rate is set by the People's Bank of China, and the current trading rules stipulate that the intraday fluctuation of the onshore RMB spot rate cannot exceed 2% above or minus the central parity. The central parity not only restricts the rise and fall of the onshore RMB, but also releases an important policy signal for the future trend of the RMB.

In Xing Zhaopeng's view, the central parity of the RMB exchange rate has risen steadily, highlighting the rising tolerance of regulators for the orderly depreciation of the exchange rate.

"The reason behind this is that a large number of carry trades need to be closed near the end of the quarter, narrowing the spread between the middle price and the spot exchange rate, which can guide this part of the position to close out in advance and release depreciation pressure. In addition, at present, the foreign currency assets and liabilities of many enterprises with foreign-related business are denominated in the central parity of the RMB exchange rate, and narrowing the spread will also help enterprises manage exchange rate risks. He said.

Zhang Jiantai also believes that the regulator's tolerance for the orderly depreciation of the RMB exchange rate is rising. Although the interest rate differential between China and the United States has put lasting pressure on the RMB, there is still room for the RMB to depreciate moderately against the US dollar, considering that the RMB basket exchange rate is still strong.

As of June 21, the CFETS RMB exchange rate index was reported at 99.97, up 2.6% from the beginning of the year.

The risk of depreciation is controllable

Looking forward to the RMB exchange rate in the second half of the year, Xing Zhaopeng believes that although the RMB exchange rate is under pressure, it will still fluctuate in the range of 7.25-7.30. From a technical point of view, the onshore RMB exchange rate did not fall below the three key levels of 7.27, 7.28 and 7.30. In addition, China's large state-owned banks are still providing US dollar liquidity to the market, which makes the risk of RMB depreciation manageable. "In the future, the trend of the RMB exchange rate should still be closely watched by the Federal Reserve." He said.

Zhang Jiantai believes that the People's Bank of China is expected to continue to release pressure on the depreciation of the yuan, but will regard the low of 7.3503 in September 2023 as the final bottom line. In the short term, the RMB exchange rate will continue to depreciate at a relatively slow pace. If the RMB spot begins to break out of the lower limit of the trading range, it indicates that the pressure on the RMB depreciation has been released.

As for how the Fed will cut interest rates in the second half of the year, Goldman Sachs believes that the Fed may start two interest rate cuts in September and December.

Stephen Dover, chief market strategist at Franklin Templeton, said that at the June interest rate meeting, the Fed sent a hawkish signal. However, Fed officials still expect five rate cuts by the end of 2025, meaning that the Fed's monetary policy will remain accommodative in the long run. In the future, the Fed's monetary policy will continue to be highly data-dependent, and the current US economic activity continues to expand steadily, and inflation has eased but remains high.

Xing Zhaopeng said that when U.S. inflation stabilizes and consumption weakens, the Fed will further increase the room to cut interest rates. The University of Michigan consumer sentiment index has fallen close to the 60 key level, suggesting that U.S. consumption momentum may stall.

The 2024 U.S. presidential election is about to enter a televised debate, and geopolitical factors will also affect the RMB exchange rate.

In Xing's view, if Republican presidential candidate Trump wins, he may pose a threat to the RMB exchange rate by imposing tariffs. Every 10% increase in tariffs by the U.S. government could put 1.5% depreciation pressure on the renminbi exchange rate.

Goldman Sachs said in a research report on June 25 that speeches and actions around global trade policy are becoming more hawkish, and a Trump victory could lead to high tariffs on U.S. imports, and retaliatory measures and escalating frictions may follow. The trade policy uncertainty index has risen to its highest level since the 2018-2019 trade war. According to the bank's estimates, the risk of a trade war has brought a drag of 0.3 percentage points to the year-on-year growth rate of investment in U.S.-listed companies.

Stephen Dover said economic issues have always been more important to American voters than any other. Many voters are complaining about the overall high prices under the Biden administration. For many American households, the inflation problem in the United States is largely due to the budget deficit caused by "Bidenomics" or some "mistakes" of the Federal Reserve.

In addition, China's economic fundamentals are also one of the important factors affecting the RMB exchange rate.

Xing Zhaopeng believes that judging from the data on inflation, industrial production, and exports, China's economy is stabilizing and improving. Whether China's economic fundamentals can continue to recover in the future depends on the strength and effectiveness of fiscal policy.