Exchange Rate: The Rise Of RMB Is Blocked, Reaching The 7.2 Pass

At the beginning of the year, global risk sentiment declined, and the dollar index rebounded, breaking through the 102 threshold again, and the RMB gradually approached 7.2 against the dollar.

On January 11, the central parity rate of the RMB against the US dollar was 7.1087, with a 32 basis points reduction, the third consecutive day of reduction. The onshore RMB closed at 7.1704 against the US dollar at 16:30 on January 10, down 114 points from the previous trading day; At 3:00 on the 11th, it closed at 7.1724 yuan, down 36 points from the closing on Tuesday night. The offshore RMB was at 7.1751 against the US dollar at 9:35 on the 11th.

As of 20:34 on January 10, USD index quoted 102.43. A foreign exchange trader of a foreign bank said that the US dollar began to fight back, and the resilience of the US economy also made the market feel that the bet on the Federal Reserve's interest rate cut was too extreme. The interest rate gap between China and the United States expanded again to 1.5% from the lowest 1.3% in December 2023. Although the previous upsurge has broken up many accumulated short positions in RMB, the rebound will eventually be limited in the context of the widening interest rate gap between China and the United States.

It's not easy for the US dollar to go down

The three major stock indexes of the United States had a bad start in 2024. Last week, the S&P 500 index and the NASDAQ index were running for four consecutive days and five consecutive days, respectively. The previous nine consecutive weeks of gains came to an end. Against the background of rising risk aversion, the dollar index rebounded, rebounding to 102.77 from the 100.60 level at the end of last year.

The greater than expected resilience of the US economy is also playing a role. The process of interest rate increase by the Federal Reserve over the past year has effectively alleviated inflationary pressure, but has not impacted the employment market. The possibility of a soft landing of the economy has increased significantly, which gives the Federal Reserve more patience and confidence to maintain the status quo, that is, to end the interest rate increase but not rush to cut or moderate interest rate reduction. The decline in US recession expectations is also a major support for the current US dollar, while US inflation is still declining moderately.

Wang Xinjie, chief investment strategist of Standard Chartered China Wealth Management, said, "If the difference between the interest rate of the US dollar and that of other currencies has not narrowed significantly, it will be difficult for the US dollar to depreciate (the central banks of other developed countries are also expected to cut interest rates). It is expected that the US dollar will remain in a volatile pattern."

Short term rise of RMB blocked

In December 2023, the RMB once rose above the 7.1 threshold against the US dollar, once reaching 7.0865. However, since the end of December 2023, with the rebound of the US dollar, the momentum of the RMB has been blocked. Meanwhile, China's economic data in December was weaker than expected, which also affected market sentiment.

In addition, the market's expectation of the central bank's interest rate cut is still rising. However, Wang Tao, head of Asian economic research and chief China economist of UBS Investment Bank, said that the interest rate cut itself was not the main factor affecting the RMB, but the key was the change of the US dollar.

UBS has previously said that with the passage of time in 2024, the US dollar is expected to weaken and the US dollar/RMB will slowly fall to 7. However, if the US dollar strengthens again in the first half of 2024, and China's macroeconomic performance is lower than expected, the US dollar/RMB may rise back to 7.3.

In the future, the attitude of the People's Bank of China will remain the key, which will also be reflected in the pricing of the middle price. In addition, many foreign banks believe that a more sustainable appreciation of the currency requires more convincing prospects for China's economic growth and improved asset market performance. At the same time, if the interest rate gap between China and the United States remains high, the rebound of the RMB may still be limited.

Enterprise risk avoidance

Li Bin, Director of the Macro prudential Administration of the People's Bank of China, said that in the next step, the People's Bank of China will pay more attention to improving the quality and level of RMB internationalization, steadily and prudently promote the international use of RMB, and better meet the market needs of business entities such as transaction settlement, investment and financing, risk management, etc.

The Central Bank will strengthen the construction of RMB cross-border payment system and improve the efficiency and security of RMB clearing. We will promote the construction of the offshore RMB market, improve the RMB liquidity supply mechanism in the offshore market, enrich offshore RMB risk management tools, and enrich offshore RMB financial products.

The central bank said that it would optimize the layout of RMB clearing banks, strengthen international monetary cooperation, promote the healthy development of the offshore RMB market, and at the same time increase the construction and expansion of cross-border payment systems. The People's Bank of China has authorized 31 RMB clearing banks in 29 countries and regions, covering major international financial centers in the world.

Offshore RMB financial products are increasingly abundant. In addition to Hong Kong stock RMB counters and central bank offshore bills, more and more banking institutions are developing new offshore RMB financial products. In terms of the construction of RMB risk management tools, many banks can provide forward settlement and sales of foreign exchange, RMB foreign exchange options, RMB foreign exchange swaps Emerging market currency non deliverable forwards (NDF) and other foreign exchange derivatives help overseas enterprises more effectively avoid the risk of RMB exchange rate fluctuations.