Reporter of the Economic Business: Zhang Shoulin Reporter of the Economic Business Business: Ma Ziqing
On August 29, the value of the onshore RMB against the US dollar fell below 6.9. The last time it reached this level was two years ago, the difference was that the RMB was in an appreciation channel at that time. Since mid-August 2022, the overall value of the RMB against the US dollar has been on the decline.
USD/RMB exchange rate trend since mid-August 2022 Source: Tonghuashun iFinD
Corresponding to it, the USD index broke through 109, setting a new high in the past 20 years.
From the perspective of event factors, on August 26, Beijing time, at the 2022 Jackson Hall Global Central Bank Annual Meeting hosted by the Federal Reserve Bank of Kansas City, Powell, Chairman of the Federal Reserve of Federal Reserve, delivered a speech saying that he would continue to raise interest rates in and there are risks in early easing monetary policy.
Industry believes that in order to curb high U.S. inflation, the Federal Reserve needs to implement a tight monetary policy for a long time to reduce inflation to a low and stable level.
Regarding the recent trend of the RMB, Tao Chuan, chief analyst of Dongwu Securities macro, pointed out in a telephone interview with a reporter from the Daily Economic News that the recent changes in domestic interest rates show that the weight of exchange rate is relatively low under consideration for various policies. The monetary authorities tolerate the depreciation of the RMB to a certain extent. The core logic is to focus on the inside.
The Federal Reserve regards curbing inflation as the top priority
Recently, in addition to the RMB falling against the US dollar, the pound, the euro and the Japanese yen have faced depreciation pressure. Among them, the pound closed at 1.2655 against the US dollar on May 30, and fell to 1.1648 before the reporter submitted the article on August 29.
GBP/USD exchange rate trend Source: Tonghuashun iFinD
So far, the Federal Reserve still regards curbing inflation as its top priority. Powell said, "Without price stability, the lasting and strong labor market situation will not benefit everyone." At the July interest rate meeting, the Federal Reserve raised the target range of the federal funds rate by 75 basis points to 2.25%-2.5%. Powell said that the Fed's path to hikes in September depends on economic data such as inflation and employment levels, which is the same as the statement of the interest rate meeting in July.
The U.S. Consumer Price Index (CPI) in July rose 8.5% year-on-year, maintaining its highest level in the past 40 years, but lower than the growth rate of 9.1% in June.
The Fed's long-term inflation target is 2%. There is still a long way from the current high inflation level to the target level. This shows that fighting inflation will be the Fed's unchanged primary political task for the foreseeable future.
In the second quarter of 2022, the US real GDP increased by -0.6% year-on-month. According to the White House 4-year budget report on August 23, the United States has lowered its economic growth expectations for the next two years, significantly reducing the real GDP growth forecast in 2022 from 3.8% in March to 1.4%.
High inflation and low growth suggests that the United States is currently struggling in the stagflation and economy.
Powell evaluated the risks currently facing, saying that the longer high inflation lasts, the greater the possibility that expectations of rising inflation will become more entrenched, which triggers the risk of rising "wage-price spiral". To this end, it is necessary to resolutely implement monetary tightening policies to prevent the public from forming long-term high and volatile inflation expectations.
In terms of rate hike pace, Lu Haomin, an analyst at the Bank of China Research Institute, predicts that the median federal funds rate will be slightly below 4% by the end of 2023.
For non-US economies, the Fed's continuous tightening policies have guided the return of the US dollar. Under this circumstance, non-US dollar currencies have continued to be under pressure recently.
Expert: The core contradiction in the current domestic economy lies in stabilizing real estate
August 22, People's Bank of China successfully issued two RMB central bank notes in Hong Kong, including 10 billion yuan in 3-month central bank notes and 15 billion yuan in 1 year central bank notes. People's Bank of China official stated that the issuance was widely welcomed by overseas investors, including banks in the United States, Europe, Asia and other countries and regions, institutional investors such as central bank , funds, insurance companies, and international financial organizations actively participated in the subscription. The total bidding volume was close to 75 billion yuan, about 3 times the issuance volume, indicating that RMB assets are highly attractive to overseas investors and also reflect the confidence of global investors in the Chinese economy.
On the same day, the LPR interest rate was lowered again.Tao Chuan, chief analyst of Dongwu Securities Macro, pointed out in a telephone interview with a reporter from the Daily Economic News that this time it was an asymmetric interest rate cut. The 1-year LPR decline was 5bp, while the 5-year LPR declined reached 15bp. It is obvious that this move is intended to stabilize real estate and thus the economy. From the perspective of risk prevention, the core contradiction in the current domestic economy is still to stabilize real estate.
Source: People's Bank of China official website
Tao Chuan reminded that before that, on August 15, the central bank had lowered the MLF interest rate in open market operations. Recent changes in interest rates show that the weight of the exchange rate is relatively low under consideration of various policies. The monetary authorities tolerate the depreciation of the RMB to a certain extent. The core logic is to focus on the inside.
In Tao Chuan's view, this is a result of a long-term and short-term trade-off. In the short term, stabilize real estate without risk, thus bringing good long-term economic expectations. Although the exchange rate is under short-term pressure, at the long term, stabilizing the economy can prevent the exchange rate from depreciating continuously.
Regarding the trend of the RMB since this year, the People's Bank of China recently released the "Second Quarter Monetary Policy Implementation Report", pointing out that since 2022, cross-border capital flows and foreign exchange supply and demand have basically balanced, and market expectations are generally stable. The market plays a decisive role in the formation of the RMB exchange rate. The RMB exchange rate fluctuates in both directions and increases elasticity, which plays the role of an automatic stabilizer for the macro economy and balance of payments.
According to the "2nd Quarter 2022 China Monetary Policy Implementation Report" released by the People's Bank of China on August 10, as of the end of June 2022, the balance of domestic RMB financial assets held by overseas entities was 10.1 trillion yuan, of which the scale of stocks and bonds held was 3.6 trillion yuan, which was 5.5 times and 4.3 times that of the end of 2016 respectively. At the same time, more economies use the RMB as their official reserve currency, and domestic and foreign entities use the RMB for cross-border settlements has steadily increased.
The People's Bank of China officially stated that it will continue to enhance the flexibility of the RMB exchange rate, strengthen the expectation management of , adhere to the bottom-line thinking, do a good job in monitoring and analysis of cross-border capital flows and risk prevention, maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level, and give full play to the automatic stabilizer function of the exchange rate to regulate the macro economy and balance of payments.
Daily Economic News
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