On the 22nd, the offshore RMB depreciated sharply again, breaking through the “7.1” mark. What happened? Will the RMB depreciate next?
The yuan fell below the 7.1 mark
Data show that on September 22, the offshore RMB exchange rate against the US dollar fell below the 7.1 mark, depreciating more than 300 points within the day, reaching a maximum of 7.1047, continuing to hit a new low since June 2020.
The onshore RMB exchange rate against the US dollar reached a maximum of 7.0947, depreciating more than 400 points within the day.
According to data from the Foreign Exchange Trading Center, on September 22, the central parity rate of the RMB was reported at 6.9798, a decrease of 262 points.
In this regard, Industrial Securities believes that this round of RMB depreciation may be more of a “passive depreciation” due to the strengthening of the US dollar.
From three aspects: the fundamental resilience is still strong + the U.S. dollar index has strengthened significantly amid rising tightening expectations; the central bank’s interest rate cuts have driven down China’s government bond yields, and the inversion of interest rates between China and the United States has further deepened; as exports have fallen year-on-year, the current account has had a negative impact on the RMB exchange rate. The support margin weakens.
Fed raises rates again by 75 basis points
This has to focus on the Federal Reserve. In the early morning of the 22nd, the U.S. Federal Reserve concluded its two-day monetary policy meeting and announced that it would raise the target range for the federal funds rate by 75 basis points to between 3% and 3.25%. This is the third consecutive 75 basis point interest rate hike by the Federal Reserve this year.
Previously, the latest survey from the Chicago Mercantile Exchange Group’s (CME) “FedWatch” tool showed that market participants expected that the probability of the Fed raising interest rates by 75 basis points in September was 82%, and the probability of raising interest rates by 100 basis points was 82%. 18%.
Powell also reiterated the hawkish signal he released in late August, which emphasized the Fed’s determination to reduce inflation and was wary of the serious consequences of prematurely easing monetary policy and allowing high inflation to solidify. The Federal Reserve started an interest rate hike cycle in March this year to deal with high inflation. It has raised interest rates five times in a row, with a cumulative increase of 300 basis points.
The Federal Reserve has raised interest rates sharply one after another, and economists are worried about the risk of economic recession. Forecasts show that Fed officials’ median forecast for the U.S. unemployment rate in the fourth quarter of 2023 is 4.4%, an increase of 0.5 percentage points from the June forecast.
In addition, according to the latest quarterly economic forecast released by the Federal Reserve that day, Fed officials’ median forecast for economic growth from the fourth quarter of last year to the fourth quarter of this year was 0.2%, significantly lower than the 1.7% forecast in June, reflecting their expectations for the U.S. economy. Expectations for the economic outlook are more pessimistic.
Will the RMB continue to depreciate?
Industrial Securities pointed out that although the RMB is still under pressure to depreciate, the central bank’s signal to “stabilize the exchange rate” has appeared, and there is no need to worry too much about the depreciation of the RMB. When the central parity rate of the USD/CNY exchange rate breaks upward or approaches 6.9, the probability that the central bank will use macro-prudential tools for cross-border capital flows to “stabilize the exchange rate” may increase significantly.
On September 5, the central bank announced that it would lower the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points, sending a strong signal of “stabilizing the exchange rate.” According to observations, there may also be signs of reactivation of countercyclical factors in the near future. Historically, the central bank’s macro-prudential tools for cross-border capital flows have been remarkably effective in stabilizing exchange rates.
CITIC Securities believes that the main depreciation pressure on the RMB comes from external sources. Under the Federal Reserve’s hawkish monetary policy, the U.S. dollar index is likely to continue to rise in the next 1-2 months. From a medium-term perspective, the extent of RMB depreciation may be limited.
Currently, the U.S. economy may be gradually heading towards a substantial recession, while China’s economy is expected to achieve a weak recovery in the second half of the year. This round of RMB depreciation will be weaker than that in April and May, and may even appreciate slightly after the U.S. dollar index peaks. It is expected that the U.S. dollar-RMB exchange rate will center around 6.7-6.9 by the end of the year.
Huang Wentao, chief economist of CITIC Securities, said that the central bank may favor the financial side between monetary easing and exchange rate. As long as the depreciation does not exceed the mainstream non-U.S. currency, the central bank can tolerate exchange rate fluctuations. Therefore, the exchange rate does remain “broken” in the medium and long term. 7″ pressure, but the impact on capital outflows and market confidence has weakened.
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