Economic Observer Ouyang Xiaohong/Text The answer is 50% probability. Because the market is still in the midst of the repeated pull between strong expectations and weak reality, it is difficult to distinguish between them.
In the past year of 2022, the RMB depreciated against the US dollar by about 10%; its one-year decline almost offset the sum of the increases in the previous two years. For example, driven by market supply and demand dominated by trade surplus , the central parity rate of the RMB against the US dollar rose by 6.9% and 2.3% respectively in 2020 and 2021. It can be said to have achieved the "second consecutive rise" driven by the rebound of the US dollar index .
The reason why the RMB can counterattack in 2023 is a 50% probability. On the one hand, as we all know, in addition to the strength of the US dollar in 2022, most currencies are falling; however, things have started to change since the end of October. U.S. inflation data declined, with U.S. CPI falling to 7% and core PCE falling to 4.8% in November; despite slowing down interest rate hikes, the Federal Reserve still remains hawkish, and the U.S. dollar index has subsequently retreated from around 115 to the current 104. Including 2023, it is still uncertain whether the U.S. dollar will decline significantly. The key factors may lie in changes in U.S. inflation and the pace of Fed rate hikes and balance sheet reduction. However, "the dollar has peaked" and "recession concerns have replaced inflation concerns" are almost Wall Street consensus forecasts. In view of this, there is a view in the market that the RMB is expected to make a strong counterattack.
In fact, in the fourth quarter of 2022, the euro, pound, yen and renminbi all unexpectedly reversed and rose sharply. On December 5, the RMB rose by more than 800 points during the day, rising above "7" again; on December 29, CNH ( offshore RMB ) and CNY (onshore RMB) reported 6.9798 and 6.9651 respectively; the central parity rate of the RMB was reported at 6.9793.
The jump in the RMB from close to 7.4 to the current 6.9 is mainly due to the adjustment of China's epidemic prevention policy and the strong expectations brought about by the weakening of the US dollar and the "relaxation" of real estate financing policies. To a certain extent, even if the US dollar peaks, it may not mean that the US dollar will encounter "Waterloo" soon.
On the other hand, based on the three major factors that affect the RMB exchange rate (trade and interest rate , economic fundamentals), the future trend of the RMB exchange rate may not be optimistic. To a certain extent, it is market sentiment and investor confidence that have helped the RMB return to its upward trend since November. It is also the market that has chosen the former between strong expectations and weak reality.
The current domestic and foreign demand is relatively sluggish. Exports of in November were -8.7% year-on-year, and the decline was much greater than expected. This is related to both the decline in global prosperity and the high base for the same period. Domestic supply constraints in November are also a problem. Since August, China's export growth has declined year-on-year for four consecutive months, which means that China's economic fundamentals have continued to be under pressure. If the global economy enters recession in 2023, it can be deduced that China's exports in 2023 may be -8% year-on-year. This shows that the internal and external dynamic forces supporting the RMB exchange rate are weakening.
Throughout the whole year, the RMB exchange rate experienced two waves of rapid decline in April and from mid-to-late August to October. The first wave may be related to the Shanghai epidemic, which affected the production and supply chain; the second wave was a period when China's exports continued to decline year-on-year. In other words, the fundamentals are intact and the exchange rate is stable; on the contrary, the fluctuations are large.
It is true that with the Federal Reserve likely to slow down interest rate hikes and its economic expectations weakening, the U.S. dollar index has fallen by 7% in the past month. Non-U.S. currencies have risen to varying degrees, compared with the gains of the euro, pound, and yen; the RMB has rebounded relatively little.
In this regard, I am afraid that it is not appropriate to attribute the recent rebound of the RMB to fundamentals. The real power that affects the RMB is the internal and external dynamism of the economy, market holdings, and the confidence in using it. And this depends on the economic growth and repair momentum and potential in 2023. In the future, the driving force for whether the RMB can counterattack may still depend on the capital inflow and export situation of the investment portfolio.
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