A key battle to hold the 7.3 offshore RMB exchange rate

As of 13:30 on June 28, the RMB exchange rate against the US dollar in the offshore market hovered around 7.2973, falling below the 7.3 integer mark for three consecutive days. This indicates a sudden escalation of the offensive and defensive battle of the offshore RMB on the front line of 7.3.

A foreign exchange trader at a Hong Kong bank told reporters that although the central parity of the RMB exchange rate against the US dollar on June 28 rose by 2 basis points from the previous trading day to 7.1268, the offshore RMB exchange rate fell again to 7.3061 in early trading that day, indicating that the short selling power in the foreign exchange market is still strong.

Behind this, the global financial market's concerns about the uncertainty of the French election have risen, causing the dollar index to rise quickly above the 106 integer mark, and speculative capital continues to bet on the technical decline of the offshore yuan exchange rate to profit.

"At present, a lot of speculative capital is still betting that China's relevant departments may soon relax the fluctuation range of the RMB exchange rate in a single day to avoid an overshoot and fall of the RMB exchange rate." The Hong Kong bank forex trader noted. But it also allows speculative capital to see more room for profit from shorting the renminbi.

It is worth noting that in the face of increased pressure on RMB short selling, many banks and asset management institutions are still actively buying the bottom in a "-for-tat", causing the offshore RMB exchange rate to regain the 7.3 integer mark for three consecutive days.

Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, believes that the recent strengthening of the US dollar index has put some downward pressure on non-US currencies such as the RMB, especially the uncertainty of the political outlook in Europe and the depreciation of the yen, which further boosted the strength of the US dollar and the downward pressure on the RMB exchange rate. However, judging from the trend of the internal and external environment, the RMB exchange rate is expected to continue to fluctuate in both directions around a reasonable equilibrium level.

The long-short game has quietly escalated

A number of industry insiders believe that one of the main reasons why the foreign exchange market has seen an offensive and defensive battle of offshore RMB at 7.3 for three consecutive days is that some investment institutions believe that 7.3 may be the "bottom range" identified by relevant Chinese departments.

"Last week, the People's Bank of China (PBOC) issued a new 15 billion yuan of offshore central bills to withdraw RMB liquidity in the offshore market, which seemed to be sending a clear signal to the market that it does not want the offshore yuan to fall in overshoot." The above-mentioned foreign exchange trader of the Hong Kong bank noted. Affected by this, some asset management institutions believe that the relevant departments may hope that the offshore RMB can stabilize at the 7.3 line, and have actively bought the offshore RMB below 7.3.

"In addition, as far as the central parity of the RMB exchange rate against the US dollar continues to fluctuate slightly in recent days, it also reflects that the relevant departments have affected the decline and fall of the RMB exchange rate at home and abroad by adjusting the central parity." He analyzed.

Wang Qing, a macro analyst at Oriental Jincheng, pointed out that this means that the regulatory role of the central price is increasing, which will help prevent the abnormal decline and fluctuation of the RMB exchange rate at home and abroad from the US dollar trend in the process of the US dollar index rising. However, this does not mean that the relevant authorities will stick to a certain exchange rate point.

The reporter learned that the reason why some asset management institutions believe that the offshore RMB exchange rate may not fall below 7.3 is that they found that the offshore RMB has fallen by only about 0.5% since June, which is lower than the US dollar index (about 1%) in the same period. Behind this, in addition to the issuance of offshore central bills by relevant Chinese departments to withdraw RMB liquidity in the offshore market, which effectively curbed the decline of offshore RMB, the current economic fundamentals of China do not support the offshore RMB falling below the 7.3 integer mark.

This has invisibly escalated the offensive and defensive battle of the offshore RMB exchange rate at 7.3 in the past three trading days.

A foreign exchange broker bluntly told reporters that the main ones who are actively buying offshore RMB below 7.3 are large banks and asset management institutions. Their bottom-buying behavior has also formed a "-for-tat" situation with speculative capital.

In his view, despite the "support" of the rise of the dollar index and the record low of the yen exchange rate (dragging down the depreciation of other Asian currencies), speculative capital "did not have the upper hand" in shorting the yuan. Because speculative capital is worried that the relevant Chinese authorities will introduce other measures to stabilize the exchange rate, so that they will retreat.

Specifically, most speculative capital still adopts the trading strategy of borrowing offshore RMB on a daily or weekly basis to sell short and arbitrage, and if the relevant Chinese authorities further tighten the RMB liquidity in the offshore market and raise the financing cost of offshore RMB, or reintroduce countercyclical factors to affect the trend of RMB fluctuations, the above-mentioned short selling arbitrage trading strategy of speculative capital will face a huge risk of loss.

"Although some overseas speculative capital buys forward foreign exchange options or forward foreign exchange futures positions that bet that the offshore RMB exchange rate will fall to 7.33-7.35 in the next month, the scale of these forward derivatives transactions is not enough to affect the trend of the offshore RMB exchange rate." The forex broker said bluntly. One of the important reasons is that these forward short RMB derivatives transactions quickly found counterparties, indicating that there is still a lot of capital in the foreign exchange market that is actively bullish on the trend of the RMB exchange rate.

The rational operation of foreign trade enterprises has increased

It is worth noting that when the offshore RMB exchange rate is in full swing in the offensive and defensive battle on the front line of 7.3, the influence of corporate follow-up operations on the RMB exchange rate is significantly weakening. More and more importers have avoided the risk of a surge in foreign exchange purchase costs caused by the decline in the RMB exchange rate through foreign exchange hedging, and the emergency foreign exchange purchase operation has cooled down significantly.

"In the past, as long as the offshore RMB fell below 7.3, importers would set off an emergency wave of foreign exchange purchases to hedge against risks, which heated up the herd effect in the foreign exchange market. However, nowadays, more and more importers have locked in the exchange rate price of future foreign exchange purchases through forward foreign exchange swap transactions, so the RMB exchange rate has fallen below some integer thresholds, which is difficult to stimulate their urgent foreign exchange purchase demand. A director of the financial market department of a joint-stock bank pointed out to reporters.

A financial director of an import enterprise in Jiangsu and Zhejiang also told reporters that in previous years, they locked in less than 40% of the amount of foreign exchange purchases through forward foreign exchange swap transactions, and once the offshore RMB exchange rate fell to 7.3, enterprises could only buy foreign exchange in a hurry and exchange it for foreign currency required for import procurement in the next few months. Today, their foreign exchange hedging accounts for more than 75%, and the corresponding foreign exchange risk exposure has been greatly reduced, so there is no need to urgently buy foreign exchange to hedge against the current offshore RMB falling to 7.3.

"In fact, we reserve about 25% of our exposure to foreign exchange exchange in order to observe the future trend of the RMB exchange rate and find the right time to buy foreign exchange." He told reporters that behind this, enterprises believe that the probability of the RMB exchange rate bottoming out in the future is greater, and there is an opportunity for enterprises to exchange foreign currencies at a better exchange rate for import purchase payments.

The reporter learned that many export enterprises have quietly increased their efforts to settle foreign exchange at high prices. "The current period is indeed a good window for foreign exchange settlement." A person in charge of an electronic product export enterprise told reporters.

The head of the financial market department of the above-mentioned joint-stock bank pointed out that the rational operation of export enterprises to settle foreign exchange at high prices has increased, which has also constituted new support for the current stabilization of the RMB exchange rate.

In his view, another key reason why it is difficult for enterprises to trigger a further decline in the offshore RMB exchange rate is that more and more enterprises are expanding the RMB settlement of cross-border trade, which makes the influence of cross-border trade dollar settlement on the trend of domestic and foreign RMB exchange rates continue to weaken.

Wang Chunying, deputy director of the State Administration of Foreign Exchange, pointed out that in order to help foreign economic and trade enterprises better cope with the risk of exchange rate fluctuations, the State Administration of Foreign Exchange, together with relevant departments, has formed a relatively mature service system in terms of increasing policy supply, optimizing financial services, and strengthening publicity and training, and the ability of enterprises to hedge against exchange rate risks has been effectively improved. In the first five months of 2024, more than 16,000 "first accounts" for exchange rate hedging were added, and the foreign exchange hedging ratio of enterprises was 27.2%, an increase of 3.3 percentage points year-on-year, indicating positive progress in corporate exchange rate risk management services.

Wang Chunying revealed that the State Administration of Foreign Exchange will consistently improve the exchange rate risk management services of enterprises as a long-term and basic key work, strengthen the promotion of the concept of exchange rate risk neutrality, guide the banking sector to continue to optimize the exchange rate risk management service capabilities, effectively improve the level of enterprise exchange rate risk management, and help enterprises operate steadily.

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