Recently, the RMB has continued to depreciate against the US dollar, which has once again attracted market attention. As of September 8, the US dollar closed at 6.96 against the RMB, approaching the critical threshold of "breaking 7".

Summary

Recently, the RMB has continued to depreciate against the US dollar, which has once again attracted market attention. As of September 8, the US dollar closed at 6.96 against the RMB, approaching the critical threshold of "breaking 7". From the perspective of this year, the cumulative depreciation of the RMB against the US dollar has reached 8.46%. Although the RMB exchange rate against the US dollar weakened significantly, it remained stable against a basket of currencies. This shows that 's current depreciation of the RMB against the US dollar is mainly caused by the strong US dollar, rather than the structural deterioration of China's economic fundamentals .

From historical experience, every time the Fed hike rate tightening cycle will trigger funds to flow out of emerging markets, and the strengthening of the US dollar puts pressure on emerging currencies in Asia. Among the major emerging Asian currencies, the RMB is not the only currency that depreciates against the US dollar. The major emerging Asian currencies depreciate against the US dollar in in the year.

Judging from the recent impact of USD index on RMB exchange rate , RMB exchange rate against the US dollar has returned to a situation dominated by the US dollar index, that is, the US dollar strengthens, the RMB exchange rate against the US dollar weakens . From the second half of 2021 to April this year, the US dollar index and the US dollar exchange rate against the RMB showed a differentiation trend, forming a situation where the US dollar index and the RMB exchange rate strengthened simultaneously. Since the RMB opened a depreciation channel against the US dollar at the end of April this year, the correlation between the US dollar index and the US dollar exchange rate against the RMB has turned from negative to positive again, and reached a strong correlation of 87% in August.

The Fed's policy stance is an important factor affecting the RMB exchange rate expectations against the US dollar, and the speech of Jackson Hall by Federal Reserve Chairman Powell is the dominant factor in the exchange rate market in the near future. Powell reiterated the Fed's tough attitude towards inflation, even if it is recession, and said that tight monetary policy will last for some time.

We observe the RMB exchange rate trend from the perspective of the Sino-US interest rate spread and interest rate parity . Our forecast results show that the forecast value of the US dollar against the RMB in September is 6.64, significantly lower than the current exchange rate level of 6.98; the forecast value of the US dollar against the RMB in March next year is 6.97. We believe that the RMB against the US dollar spot exchange rate has certain appreciation pressure .

does not need to be overly pessimistic about the exchange rate of RMB . In recent years, the two-way fluctuation range of the RMB exchange rate against the US dollar has increased, and the exchange rate elasticity has increased. Taking the 2020 COVID-19 epidemic as an example, since World Health Organization (WHO) announced that it would list the COVID-19 epidemic as a global pandemic, the rising risk aversion sentiment has driven the US dollar index to rise rapidly, and the US dollar against the RMB exchange rate once exceeded 7. However, in the second half of 2020, as China's economic fundamentals significantly improved, the RMB exchange rate began to appreciate and continued until the first quarter of this year. At present, the central bank of adjusts the exchange rate market by reducing the foreign exchange deposit reserve ratio, and my country's fiscal and monetary policies both make efforts to conduct countercyclical adjustments. With the subsequent improvement of my country's economic fundamentals, the RMB exchange rate is expected to stabilize and rebound.

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. The RMB is under pressure against the US dollar, but remains stable against a basket of currencies

Recently, the RMB has continued to depreciate against the US dollar, which once again attracted market attention. As of September 8, the US dollar closed at 6.96 against the RMB, approaching the critical threshold of "breaking 7". From the perspective of this year, the cumulative depreciation of the RMB against the US dollar has reached 8.46%.

Although the RMB exchange rate against the US dollar weakened significantly, it remained stable against a basket of currencies. Judging from the CFETS RMB index released by the China Foreign Exchange Trading Center, as of September 2, the RMB index was 102.02, with a decrease of only 0.4% this year.

From the perspective of the RMB against the currencies of major developed countries, the RMB depreciated the largest against the US dollar this year, and the largest appreciation against the Japanese yen and the British pound. Among them, the RMB appreciated 13.64% against the Japanese yen this year, 7.41% against the pound and 3.56% against the euro.

RMB also rises and falls against emerging market currencies. Among them, the RMB against Russian ruble html fell the most in 5 years, reaching 23.05%; the RMB against Turkish lira appreciated the largest, at 27.99%, followed by Hungarian Forin and Polish Zloty.

. The RMB exchange rate against the US dollar returned to a situation dominated by the US dollar index

Recently, the US dollar index continued to strengthen, breaking through 110 points. At noon on September 5, the US dollar index broke through the 110 mark in one fell swoop. On September 6, the US dollar index closed at 110.24, a 20-year high. In the following trading days, the US dollar index broke through 110 during the session.

USD strengthening suppresses Asian emerging market currencies, with major Asian emerging currencies depreciating against the US dollar at a similar level. From historical experience, every Fed's interest rate hike tightening cycle will trigger capital outflows from emerging markets, and the strengthening of the US dollar puts pressure on emerging currencies in Asia. Among the major emerging Asian currencies, the RMB is not the only currency that depreciates against the US dollar. As of September 2, the Korean won depreciated against the US dollar this year at 12.4%, the Thai baht depreciated against the US dollar by 9.1%, the Indian rupee depreciated against the US dollar by 6.5%, and the Malaysian ringgit depreciated against the US dollar by 6.7%. Sri Lanka's ruble depreciation against the US dollar reached 42.9% in five years, mainly due to Sri Lanka's continuous internal and external shocks such as the Easter terrorist attacks, the new crown pneumonia epidemic and geopolitical conflicts since 2019. Against this background, Sri Lanka's originally fragile economy collapsed: the debts due to cannot be paid, basic living supplies are unable to be imported, and inflation is out of control.

Judging from the recent impact of the US dollar index on the RMB exchange rate, the RMB exchange rate against the US dollar has returned to a situation dominated by the US dollar index, that is, the RMB exchange rate against the US dollar weakens when the US dollar strengthens. According to our calculations, the correlation between the US dollar index and the exchange rate of the US dollar against the RMB for 12 consecutive months is usually in the range of 80%-90%. In the second half of 2021 to April this year, the exchange rate of the US dollar index and the exchange rate of the US dollar against the RMB showed a differentiated trend. The correlation between the two turned from positive to negative, and even reached -78% at one time, forming a situation where the US dollar index and the RMB exchange rate strengthened simultaneously. We have been in the "2021 RMB Exchange Rate Annual Report - Is the RMB Exchange Rate overvalued? 》 pointed out that the RMB exchange rate against the US dollar showed strong pro-cyclical and unilateral appreciation expectations in the second half of 2021, which means that the RMB may overshoot against the US dollar and will become a source of risk for the future reversal of the RMB exchange rate against the US dollar. Since the RMB opened a depreciation channel against the US dollar at the end of April this year, the correlation between the US dollar index and the US dollar exchange rate against the RMB has turned from negative to positive again, and reached a strong correlation of 87% in August.

3. Powell's Jackson Hole's speech is the dominant factor in the recent exchange rate market

Federal Chairman Powell once again showed a tough attitude towards cracking down on U.S. inflation at the annual Jackson Hole meeting, indicating that austerity monetary policy will last for some time. On August 26, Central Time, Powell delivered an opening speech at the Jackson Hall Conference. In his speech, he mentioned, "It will take some time to restore price stability. We need to use monetary policy tool to achieve the supply and demand balance. Reducing inflation may require maintaining a period of lower than the trend, and labor market conditions will be weak. Although higher interest rates, slowing growth and weak labor markets will reduce inflation, they will also bring some pain to families and businesses. These are the costs of reducing inflation, but failing to restore price stability will mean greater pain." Regarding the Fed's subsequent monetary policy, Powell pointed out that "restoring price stability requires maintaining a tightening policy stance for a period of time. Historical experience shows that premature easing policy is not advisable."

From the perspective of this year, the Fed's attitude is an important factor affecting the expectations of the RMB against the US dollar. We measure market expectations for the RMB-US dollar exchange rate by the deviation between the onshore and offshore exchange rates. Positive values ​​indicate appreciation expectations and negative values ​​indicate depreciation expectations. Deviation data shows that there are four main time nodes this year that can significantly reflect the impact of Federal Reserve policies on the RMB exchange rate.First, the Federal Reserve officially kicked off this round of interest rate hike cycle at the interest rate meeting on March 16. The interest rate dot chart of the March meeting showed that the forecast of the Federal Open Market Committee 's rate hike this year increased from three times last year to seven times. Powell said after the meeting that he would announce the " balance sheet reduction " process this year; second, the Federal Reserve announced the "Plan to Reduce the Size of the Federal Reserve's Balance Sheet" on May 4, reducing securities holdings in a predictable and gradual way from June 1 to shrink global dollar liquidity; third, the Federal Reserve once again significantly increased the forecast range of federal funds interest rates this year on June 15; fourth, Powell's hawkish speech at the Jackson Hall meeting on August 26, reiterating the Federal Reserve's tough attitude towards inflation, even if the economic recession is at ease. Near these four time nodes, offshore market has made obvious responses to the depreciation expectations of the RMB exchange rate, especially the impact of "balance sheet shrinkage".

4. Looking at the subsequent trend of the RMB exchange rate from the China-US interest rate spread

As we discussed in the previous article, the current monetary policy of the Federal Reserve and the US dollar index are important factors that dominate the RMB exchange rate against the US dollar. Therefore, we observe the subsequent trend of the RMB exchange rate from the perspective of the China-US interest rate spread.

) From the interest rate spread between China and the United States, the RMB exchange rate after 6 months

According to our calculations, the 10-year Treasury bond spread between China and the United States has a good predictive effect on the RMB exchange rate trend after 6 months. Our calculation results show that the average exchange rate of the US dollar against the RMB in September was 6.64, significantly lower than the current exchange rate level of 6.98; according to the data in the first 6 trading days of September, the average interest rate spread between China and the United States was -63.93bp. Our results show that the predicted value of the US dollar against the RMB in March next year is 6.97.

) From the interest rate parity, the exchange rate trend

According to the interest rate parity theory , in the case of differences in the interest rates between the two countries, funds will flow from low-interest countries to high-interest countries to make profits. At the same time, investors hedge for for foreign exchange risks, and usually buy low-interest country currencies in the forward period and sell high-interest country currencies to lock in forward exchange rate . Under ideal circumstances, the exchange rate of currencies in low-interest rate countries will fall, and the exchange rate will rise; the exchange rate of currencies in high-interest rate countries will rise, and the exchange rate will fall. Investors continue to arbitrage between spot and forwards until the spread between forward and spot exchange rates is equal to the interest rate spread between the two countries.

We observe the current trend of the RMB exchange rate by observing the spot and forward exchange rates of the RMB against the US dollar and the 10-year treasury bond spread between China and the United States. Since late July, the forward price spread of the RMB against the US dollar, adjusted by the interest rate gap between China and the United States, has continued to be positive, indicating that the current spot exchange rate between the RMB and the US dollar has certain appreciation pressure.

3) There is no need to be too pessimistic about the RMB exchange rate

From the perspective of interest rate spreads between China and the United States and interest rate parity, there is a possibility that the RMB exchange rate against the US dollar is depreciated at present. Although the market continues to discuss the issue of whether the RMB exchange rate will "break 7", the so-called key points of the exchange rate cannot explain any problem. Against the current background of the Fed rate hike cycle and strong US dollar, the market has a certain panic about the depreciation of the RMB, which amplifies exchange rate fluctuations.

does not need to be overly pessimistic about the RMB exchange rate. In recent years, the two-way fluctuation range of the RMB exchange rate against the US dollar has increased, and the exchange rate elasticity has increased. Taking the 2020 COVID-19 epidemic as an example, since the WHO announced that it would list the COVID-19 epidemic as a global pandemic, the warming of risk aversion sentiment has driven the US dollar index to rise rapidly, and the US dollar exchange rate against the RMB once exceeded 7. However, in the second half of 2020, as China's economic fundamentals significantly improved, the RMB exchange rate began to appreciate and continued until the first quarter of this year. Against the backdrop of the US interest rate hike cycle, the RMB has remained stable against a basket of currencies, which shows that the current depreciation of the RMB against the US dollar is mainly caused by the strong US dollar, rather than the structural deterioration of China's economic fundamentals. At present, the central bank regulates the exchange rate market by lowering the foreign exchange reserve ratio, and my country's fiscal and monetary policies both make efforts to conduct countercyclical adjustments. With the subsequent improvement of my country's economic fundamentals, the RMB exchange rate is expected to stabilize and rebound.

(The title image of this article is source: First Financial Daily)

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text | Liu Xin Researcher of the First Financial Academy

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