The Latest Exchange Rate: What Is The Reason Behind The Loss Of RMB 7.3?

The exchange rate of RMB against the US dollar in the offshore market hit 7.3145, which also hit a year low of 7.3204.

In the opinion of insiders, the reason why the offshore RMB exchange rate fell behind the 7.3 integer threshold this time was mainly affected by five factors:

First, the US dollar index rebounded to 103, putting pressure on the RMB exchange rate;

Second, on August 15, the People's Bank of China unexpectedly lowered the MLF interest rate, leading to further differentiation of monetary policies between China and the United States, attracting overseas quantitative investment funds to quickly buy down the RMB exchange rate;

Third, the upside down of interest rate differential between China and the United States expanded to 163 basis points, the highest point in the year, making the balanced valuation of the RMB exchange rate correspondingly lower;

Fourth, the recent relatively weak economic data in China will also lead some macroeconomic hedge funds to buy down the RMB exchange rate periodically;

Fifthly, recently, there has been an outflow of funds from the north, which also poses downward pressure on the RMB exchange rate.

"Under the influence of the above factors, the market has expected the offshore RMB exchange rate to fall below the 7.3 integer threshold. Even though the central parity rate of the RMB exchange rate on August 15 was more than 600 basis points higher than the market estimate, it was still difficult to stop the decline of the RMB exchange rate that day." A foreign exchange trader of the Bank of Hong Kong pointed out to the reporter.

The reporter learned from many sources that although the offshore RMB exchange rate fell below the 7.3 integer threshold, the reversal index of the RMB foreign exchange options market was relatively stable, indicating that the expectation of a unilateral sharp decline of the RMB was not strong.

"After the offshore RMB fell below 7.3, some banks began to sell dollars, stabilizing the decline of the RMB exchange rate," the Hong Kong foreign exchange trader told reporters. This reflects from another aspect that some overseas investment institutions are cautious in selling short RMB. The reason is that 7.3 may be a "policy bottom" - once the onshore RMB exchange rate falls below 7.3, relevant Chinese departments may introduce new measures to stabilize the exchange rate at any time to reverse the trend of the exchange rate.

It is worth noting that in the face of the offshore RMB exchange rate falling below 7.3, import enterprises also found their own foreign exchange hedging measures.

A chief financial officer of a soybean import enterprise disclosed to the reporter that recently they found that different banks had differences on the future trend of the RMB exchange rate, but they also generally believed that the relevant departments of China would not sit back and watch the RMB exchange rate fall sharply in disorder.

"We also adjusted our foreign exchange hedging strategy when we were unable to determine the direction of the future fluctuation of the RMB exchange rate. For example, we need to import 12 ships of South American soybeans every year. Now we have to purchase US dollars from one ship and RMB from one ship in turn, so that we can effectively avoid the risk of RMB exchange rate fluctuations against the US dollar," he told reporters.

A head of the corporate business department of a joint-stock bank told the reporter that although the offshore RMB exchange rate fell behind 7.3, more and more import enterprises had locked the purchase price of foreign exchange through offshore forward foreign exchange swap transactions, so their demand for emergency foreign exchange purchase and hedging fell significantly compared with the past.

In his view, after many ups and downs of the RMB exchange rate in the past two years, more and more enterprises have realized that the risk of loss from betting on the exchange rate is high. It is more prudent to lock the price of settlement and sale of foreign exchange through foreign exchange hedging early.

Foreign exchange expected to be stable

In the view of the aforesaid foreign exchange traders of the Bank of Hong Kong, although the offshore RMB exchange rate fell below the 7.3 integer mark on August 15, the trading sentiment in the foreign exchange market seemed quite stable.

"Under the resonance of many factors, the foreign exchange market has expected that the RMB will fall below the 7.3 integer threshold, but they do not seem to think that the RMB exchange rate will fall sharply and disorderly as a result," he told reporters. On August 15, many overseas investment institutions that bought down RMB also appeared quite cautious, because they believed that after the RMB exchange rate fell below 7.3, the relevant Chinese departments were likely to introduce new measures to stabilize the exchange rate at any time, exposing the short selling strategy to a high risk of failure.

The reporter learned that the current overseas investment institutions that bought down RMB did not use high capital leverage, and they basically adopted the trading strategy of closing positions within the day, because they were worried that holding overnight positions would be vulnerable to the impact of the new policy of stabilizing the exchange rate of relevant Chinese departments.

In the view of a number of Hong Kong private equity fund managers, the main capital force to buy down RMB is still overseas quantitative investment funds. Under the influence of the reversal of interest margin between China and the United States hitting a year high and the US dollar index recovering 103, their program trading model is constantly buying down the RMB exchange rate.

However, to their surprise, the reversion index of the RMB options market was not affected by this, and still showed a steady fluctuation trend, indicating that the short selling of quantitative funds did not cause a significant rise in the expectation of RMB devaluation.

"Behind this is that these overseas investment institutions mainly use the negative correlation between the dollar index and the RMB exchange rate to carry out short arbitrage." The foreign exchange trader of the Bank of Hong Kong believes. Behind this, they believe that this short selling strategy is relatively safe and will not trigger the "concern" of relevant Chinese departments about the abnormal decline of the RMB.

It is worth noting that after the offshore RMB fell below 7.3 on August 15, some banks began to sell dollars, which also made the market feel that the RMB lacked the "momentum" to continue to fall sharply.

A Hong Kong private equity fund manager revealed to the reporter that although the foreign exchange market generally believed that the RMB exchange rate might fall to 7.4-7.5, most institutions believed that there was a high probability that the relevant Chinese departments would introduce measures to stabilize the exchange rate during this period, so they also took a step by step view. Once they saw that the relevant Chinese departments took action, they would quickly make up for the short positions and leave the market.

Foreign exchange hedging of import and export enterprises

The reporter learned from many sources that although the offshore RMB exchange rate fell below 7.3, the import enterprises seemed quite calm about it.

"In the past, as long as the RMB exchange rate fell to a low point within the year, import enterprises would set off a wave of emergency foreign exchange purchases to avoid risks, which led to a sharp increase in the herding effect of the foreign exchange market. But now, more and more import enterprises have locked in a considerable part of the cost of foreign exchange purchases by delaying foreign exchange swap transactions, so the decline in the exchange rate is difficult to stimulate their emergency foreign exchange purchase demand." The head of the public sector of the above joint-stock bank pointed out to the reporter.

A financial director of an import enterprise in Jiangsu and Zhejiang also told the reporter that in the past, the amount of foreign exchange purchased locked by them through forward foreign exchange swap transactions accounted for less than 30%, so once the RMB exchange rate fell to a low point within the year, enterprises would feel nervous and rush to purchase foreign exchange to avoid risks; But now, their foreign exchange hedging ratio is more than 65%, leaving less than 35% of their foreign exchange risk exposure, and this part of foreign exchange risk exposure needs to be exchanged for external payment in the fourth quarter. They can easily observe the future trend of the RMB exchange rate, and then consider when the exchange price and time will be exchanged.

"After many ups and downs of the RMB exchange rate before, we have noticed that the RMB exchange rate cannot depreciate significantly all the time. Sometimes when the RMB exchange rate falls to a low point within the year, it is just a signal that it is close to the bottom," he pointed out.

The CFO also told the reporter that another reason why they are quite calm about the decline of the RMB exchange rate at present is that the proportion of RMB settlement in import trade is also rising steadily. When the RMB settlement import price they quoted is slightly higher than the US dollar settlement import price, some overseas sellers are also willing to accept a considerable proportion of RMB on bargain.

The reporter also learned that in the face of the offshore RMB exchange rate falling below 7.3, export enterprises' rational operation of foreign exchange settlement at high prices is also increasing.

"In the past, we may wait for the RMB exchange rate to continue to decline before settling, but now we prefer to stop at the first sign of good times, because the RMB exchange rate has dropped sharply before, which has caused some losses to our foreign exchange settlement earnings, and we are also aware of the high risk of failure to bet on the exchange rate." A person in charge of foreign exchange hedging of an export enterprise told reporters.

The head of the corporate business department of the aforementioned joint-stock banks believes that this has significantly reduced the herding effect of the current foreign exchange market. As a result, many overseas investment institutions can not set off a larger wave of short selling of RMB and can only end early.