In 2021, the RMB exchange rate has depreciated and risen, fluctuating in both directions, with a slight appreciation of 2.3% throughout the year. In 2022, the RMB exchange rate will face depreciation pressure caused by the “four differences”. Enterprises, especially import enterprises and foreign debt borrowing enterprises, must establish a risk-neutral concept, effectively hedge exchange rate risks, and beware of losses caused by exchange rate depreciation. Financial institutions should actively provide exchange rate hedging services to enterprises and reduce the exchange rate hedging costs of small, medium and micro enterprises.
01. The interest rate difference between domestic and foreign currencies narrowed
The market expects the Federal Reserve to raise interest rates three times in 2022. Recent market prices for U.S. federal funds rate futures show that the probability of the Federal Reserve raising interest rates by 25 basis points in March is close to 60%. If the Fed raises interest rates in March, the number of rate hikes throughout the year may rise to four. The current probability of the Fed raising interest rates four times is about 40%. At present, global financial market pricing and risk appetite do not fully reflect the Fed’s expectations for interest rate hikes. Once the Fed raises interest rates significantly beyond expectations, it will inevitably push up U.S. bond yields and narrow domestic and foreign interest rate differentials. Cross-border capital may flow from China, including Outflows from emerging markets within China have driven the depreciation of emerging market currencies, including the RMB.
02. Changes in economic growth gap
In October 2021, the International Monetary Fund (IMF) predicted that the U.S. economy would grow by 5.2% in 2022. This forecast was revised up by 0.3 percentage points from July and 1.7 percentage points from April. In contrast, the Eurozone and Japan’s economic growth forecasts for 2022 are 4.3% and 2.2%, and the IMF’s upward revision of the US economic growth forecast is also larger than the 0 and 0.2 percentage points for the Eurozone and Japan. At the same time, the U.S. Congress passed the infrastructure bill and the debt ceiling has made temporary progress. These will promote the U.S. economy to strengthen relative to other economies in 2022. Affected by this, the U.S. dollar index continued to rise in the fourth quarter of 2021 and crossed the 96 mark, reaching its highest value since July 2020, driving the currencies of other developed economies and emerging market currencies to depreciate against the U.S. dollar.
03. Foreign trade gap narrowed
The global epidemic has recently rebounded under the influence of the Omicron mutant strain. However, data from South Africa, the United Kingdom, and the United States show that most people infected with this mutant strain have mild symptoms, and the hospitalization rate and fatality rate are not high. The acceptance rate of vaccination among the American people has increased, Israel has begun vaccination with the fourth booster shot in response to the latest epidemic, and there have been news reports that the clinical trial data of drugs against new coronary pneumonia are good. Overall, the global epidemic may gradually improve in 2022. Production in major global manufacturing bases such as Asia and major raw material origins such as South America and the Middle East will continue to recover. China’s export orders may be diverted and export growth returns to normal.
04. Risk expectation gap reverses
The three major U.S. stock indexes have all reported sharp gains in 2021. The Dow, S&P 500 and Nasdaq have seen annual gains of 19%, 27% and 21% respectively, and have hit record highs dozens of times. The prices of some commodities will rise astonishingly in 2021, with Brent crude oil prices rising by 50%. Real estate prices in the United States have also risen sharply, with the median sales price of newly built homes in the United States exceeding $400,000 for the first time in history, a year-on-year increase of about 20%. Once the global financial market fluctuates due to the Fed’s interest rate hikes or valuation corrections, investor expectations shift, which may increase external uncertainty. Some risks may also spill over to my country through capital flows from emerging economies and other channels, which may also increase the trend of the RMB exchange rate. of uncertainty.
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