On September 20, the offshore RMB rose more than 300 points against the US dollar during the day, rising above 7.04 and reaching a high of 7.0388, continuing to hit a new high since this round of appreciation.
In the first half of this year, the RMB exchange rate was relatively weak, and since July, the RMB exchange rate has gradually strengthened, and in August, it started a rapid rise mode. On August 5, the onshore RMB exchange rate against the US dollar approached the 7.11 mark, and the offshore RMB exchange rate against the US dollar briefly rose above the 7.10 mark. Since then, the CNY has fluctuated in a range of 7.14 to 7.18 against the US dollar. Since September, as the Fed's interest rate cut expectations have risen, the RMB exchange rate has been rising, and the price has fluctuated in the range of 7.09 to 7.12. After the Federal Reserve announced an interest rate cut on September 19, the RMB exchange rate rose sharply. On September 20, the RMB exchange rate continued its sharp upward trend and rebounded to the level of May 2023.
Wang Qing, chief macro analyst of Oriental Jincheng, said that judging from the trend of U.S. stocks and U.S. bonds after the announcement of the interest rate cut, the rate cut is in line with market expectations. After the Fed cuts interest rates, the impact on the RMB exchange rate is mainly reflected in the trend of the US dollar, which in turn depends on the pace of the next interest rate cut. If the Fed cuts interest rates faster and exceeds market expectations, the dollar index may fall below 100, and the RMB exchange rate against the US dollar will move closer to 7.0, and the possibility of returning to the figure 6 in the short term cannot be ruled out. On the contrary, if the pace of interest rate cuts is slower, the volatility of the dollar index is limited, and the RMB exchange rate against the US dollar will remain basically stable.
China's monetary policy will get more room for easing //
Analysts point out that the impact of the Fed's interest rate cut on the global economy is two-way. On the one hand, this move will open up room for more countries to adjust their monetary policies, but on the other hand, the US dollar exchange rate will weaken as a result, which will put upward pressure on the local currency exchange rate for many export-dependent emerging market economies.
Liu Tao, a senior researcher at the Guangkai Chief Industry Research Institute, said that for China, the impact of the Fed's interest rate cut is mainly manifested in three aspects. First of all, China's monetary policy will gain more room for easing, and it has the conditions to promote a new round of RRR and interest rate cuts. Secondly, the renminbi is expected to accelerate its recovery appreciation. The inverted yield spread between China and the United States is expected to gradually narrow, thereby promoting the recovery appreciation of the RMB, but due to China's monetary policy is also in a loose state and other reasons, it is difficult for the RMB exchange rate to strengthen unilaterally and sharply in the short term. Finally, foreign funds are expected to flow into RMB assets to a certain extent, injecting liquidity into China's stock and bond markets.
Yang Delong, chief economist and fund manager of Qianhai Open Source Fund, believes that the Fed's interest rate cut may trigger a wave of global central bank interest rate cuts, pushing the dollar index down, and the appreciation of the RMB is conducive to the return of capital to emerging markets. From the perspective of global capital market valuation, U.S. stocks have the highest valuation, while A-shares and Hong Kong stocks are in the valuation depression of the global market. The expectation of RMB appreciation may trigger foreign capital inflows into RMB assets, leading to a recovery in valuations.
Wen Bin, chief economist of Minsheng Bank, observed that the trend of the RMB exchange rate did not show obvious regularity. Recently, the Fed's interest rate cut expectations have increased, the interest rate gap between China and the United States has narrowed, and the yen carry trade has been reversed to close positions, and the willingness of enterprises to settle foreign exchange has increased, and the RMB has appreciated significantly. Subsequently, as the Federal Reserve gradually cuts interest rates, the pressure on RMB depreciation will be further reduced. Wen Bin expects that the RMB exchange rate against the US dollar will fluctuate in both directions in the range of 7-7.2 most of the time during the year, and it is not ruled out that it will rise above 7 at the end of the year or early next year.
Guan Tao, global chief economist of Bank of China Securities, said that the Fed's 50 basis point interest rate cut has opened the prelude to the global monetary easing cycle. "In fact, it has partly benefited from the decline in US Treasury yields, and the negative interest rate differential between China and the United States has narrowed. Since September last year, foreign institutions have continued to increase their net holdings of RMB bonds for 12 consecutive months, reaching a total of 1.35 trillion yuan, and the Fed's interest rate cut will help ease the pressure on the RMB exchange rate adjustment.
Guan Tao pointed out that since the end of July this year, partly benefiting from the Federal Reserve's interest rate cut expectations and the pullback of the dollar index, the sharp rebound of the RMB exchange rate has risen from around 7.3 yuan to 7.1 yuan, and the domestic foreign exchange supply and demand relationship has also tended to improve. The Fed's interest rate cut will help broaden China's monetary policy autonomy, help China better increase countercyclical adjustment, actively achieve stable growth, and keep the economy operating within a reasonable range.
A relevant person in charge of the State Administration of Foreign Exchange said a few days ago that the mainland's foreign exchange market will continue to maintain a stable operation in the future. Internally, positive factors and favorable conditions have continued to accumulate in the mainland's economic operation, and the upward trend of the economy will continue to consolidate and strengthen. At the same time, the development and reform of the mainland foreign exchange market continues to advance, and the internal resilience of the market has been improved, which will continue to play a positive role in stabilizing market expectations and transactions. From an external point of view, as the monetary policy of developed economies such as Europe and the United States enters a cycle of interest rate cuts, the international financial market environment is expected to further improve.
The probability of the RMB exchange rate breaking 7 within the year is unlikely //
According to the latest research report analysis of CITIC Securities, after the Federal Reserve cut interest rates by 50 basis points, the exchange rate of onshore and offshore RMB against the US dollar appreciated to 7.06 on September 19. The report predicts that the RMB exchange rate may face fluctuations in the short term due to the possibility of centralized foreign exchange settlement by export enterprises, but the possibility of approaching 7.0 is not ruled out, but the probability of the exchange rate trend breaking through 7.0 throughout the year is low.
This judgment is based on three considerations: first, although the Fed has implemented a sharp interest rate cut, its subsequent monetary policy path has shown flexibility and stability; Second, the domestic economy is still facing the challenge of insufficient effective demand in the short term; Moreover, the People's Bank of China tends to maintain exchange rate stability and avoid the risks of excessive exchange rate fluctuations.
Historically, the past three significant appreciation cycles of the RMB exchange rate have been accompanied by a significant decline in the US dollar index and a significant improvement in domestic economic fundamentals, which provides a reference background for the current exchange rate trend.
A review of the past three cycles of RMB exchange rate appreciation shows that the US dollar index has weakened sharply and the domestic economic fundamentals have improved significantly.
From November 2022 to January 2023, the RMB exchange rate appreciated from 7.3 to 6.7. Externally, United States CPI began to peak and fall, and the Fed slowed down its rate hikes. The U.S. dollar index retreated from 112 to 102. Internally, the mainland's epidemic prevention and control policies have been optimized and adjusted, the epidemic has quickly peaked and subsided, and production and life have gradually returned to normal.
From June 2020 to May 2021, the RMB exchange rate appreciated from 7.2 to 6.4. Externally, the US Federal Reserve has implemented massive quantitative easing (QE) and the dollar liquidity crisis during the pandemic has eased. The U.S. dollar index fell from 100 to around 90. Internally, China took the lead in getting out of the predicament by virtue of its advantages in epidemic prevention and control, becoming an important global production base, and maintaining a rapid growth rate of about 20% in exports.
From January 2017 to March 2018, the RMB exchange rate appreciated from 7.0 to 6.3. Externally, although the Fed was in a rate hike cycle during this period, the European economy finally saw signs of gradual recovery, and the narrowing of the interest rate differential between the US and Europe caused the US dollar index to fall from 103 to 89. Internally, the domestic economy has solved the problem of overcapacity driven by supply-side reforms, real estate investment is also in an upward cycle, and the trend of domestic consumption upgrading is obvious.
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