On the first trading day of the Year of the Tiger, in the foreign exchange market, the RMB had a solid start and showed resilience.
On February 7, the onshore RMB against the U.S. dollar closed at 6.3578, an increase of 58 points from the previous trading day; the offshore RMB against the U.S. dollar exchange rate showed a range-bound trend, fluctuating near the 6.36 mark, with the maximum intraday fluctuation of 114 points.
On the eve of the Spring Festival this year, under the influence of strong demand for foreign exchange settlement, the RMB continued to strengthen, rising as high as 6.33, setting new highs in three and a half years. The market is highly concerned about the continued appreciation of the RMB exchange rate, which has even triggered speculation by some people that the RMB will “break through 6”.
Multiple factors comprehensively affect the trend of RMB exchange rate
The recent trend of the RMB exchange rate reflects the market’s continued strengthening of expectations for the stable recovery of China’s economy, and the optimistic judgment that foreign trade will continue to be booming. Since 2021, driven by factors such as economic fundamentals remaining solid, exports strong, and foreign capital increasing their allocation of RMB assets, the RMB has been trending steadily and strongly, with an appreciation rate of 2.41% throughout the year.
In contrast, during the Spring Festival holiday that just passed, the currencies of major developed countries experienced ups and downs. In particular, the U.S. dollar has fallen under pressure in the past week, giving up basically all the gains made after the first interest rate meeting of the year. The U.S. dollar index returned to below the 96 mark; the euro and the pound suddenly emerged under the “strong eagle” signal and performed strongly. .
However, whether the RMB exchange rate can continue to strengthen in the future depends on a combination of factors.
On the one hand, my country’s exports are still resilient, the trade surplus will remain at a high level, the global appeal of RMB assets remains strong, and overseas funds continue to flow in net, forming strong support for the RMB exchange rate;
On the other hand, the Fed’s tightening of monetary policy may lead to a periodic strengthening of the U.S. dollar, narrowing the interest rate gap between China and the United States, and there will also be certain depreciation pressure on the RMB.
Ding Muqiao, a market researcher at the Financial Markets Department of China Merchants Bank, believes that in the current environment, developed economies have entered a state of monetary policy tightening. If the Fed’s actions or “hawkishness” lag behind other central banks, the U.S. dollar index may come under pressure. After the Spring Festival holiday, the pressure on foreign exchange settlement will ease. However, due to the recent weakening of the US dollar index, the RMB exchange rate against the US dollar is expected to remain range-bound in the short term.
In addition, considering that regulators emphasize the balance between internal and external exchange rates, they will still use policy control tools such as foreign exchange reserve ratios and countercyclical factors to guide market expectations and promote the exchange rate of the RMB against the US dollar to maintain a two-way fluctuation pattern.
There are many factors that affect the exchange rate. The exchange rate may deviate from the equilibrium level in the short term, but in the medium and long term, market factors and policy factors will correct the exchange rate deviation. In other words, the basic stability of the RMB exchange rate at a reasonable and balanced level is the norm.
How to manage exchange rate risk?
In the future, factors affecting the appreciation and depreciation of the exchange rate will exist at the same time. To deal with uncertainty, plans are more important than predictions.
For enterprises, they should adhere to the exchange rate risk management principle of “preserving value” rather than “adding value” as the core, focus on the main business, establish financial discipline, and control currency mismatch and exchange rate exposure risks.
For financial institutions, they should actively provide exchange rate risk management services to small, medium and micro enterprises to reduce their exchange rate hedging costs.
Financial institutions must strengthen their own foreign exchange business risk management. They cannot help companies “speculate in foreign exchange”, nor should they themselves “speculate in foreign exchange”. They must consolidate the institutional foundation and jointly build a professional and standardized foreign exchange market. Only by adhering to the concept of “risk neutrality” can market entities such as enterprises and financial institutions better respond to external shocks.
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