Recently, the exchange rates of major currencies have fluctuated frequently, the yen has fallen continuously, breaking through historical lows, and the dollar index has also staged a dramatic rise and fall.
On the evening of April 19, Beijing time, the dollar index once approached around 100 points, and after rising on Monday and Tuesday, there was a more significant decline for two consecutive days. As of press time, the dollar index was trading at 100.494 points.
Looking at the recent currency market, the dollar has performed strongly and the appreciation fundamentals are solid; the yen, as a safe-haven currency, has lost its upward momentum and has experienced a historic depreciation, becoming the worst major currency in the world this year; the euro-dollar exchange rate has fallen continuously over the past year or so, but fundamental changes may give the euro the opportunity to continue to rebound against the dollar in the short term; the renminbi-dollar exchange rate has been exploring all the way down, but the market is confident that the renminbi exchange rate remains resilient.
The dollar strengthened further
Before Wednesday's pullback, the dollar index DXY hit a two-year high for two consecutive days, with the highest hitting above 101, flattening its highest level since March 2010.
After entering April, the DOLLAR index continued to climb, and the US dollar index rose in 13 working days within 15 working days, becoming the strongest performing currency in April.
Lin Mingtian, chief analyst of ATFX Asia Pacific, said that the prospect of a sharper interest rate hike by the Federal Reserve and the rising US Treasury yield continue to support the US dollar as the "king".
While the Fed was not the first among major economies to tighten monetary policy, investors expect the Fed to raise rates at its most aggressive pace in more than 15 years. Especially this month, more and more Fed officials have expressed support for a rate hike of 50 basis points or more, and may raise the policy target range to 2.25%-2.5% by the end of the year.
"Rising interest rates tend to attract yield-hungry investors, so more money goes into the dollar and related assets, and the trend of interest rate hikes and balance sheet reductions will continue to push the dollar higher." We believe that unless the U.S. economy weakens, disrupting the Fed's aggressive rate hike program, the upside of the dollar will remain the subject. Lin Mingtian told the International Finance News reporter.
Lin Mingtian believes that the differentiation of global central bank policy is driving the dollar to further strengthen, and the euro and yen have been hovering at a low level most of the time in recent times, indirectly benefiting the strength of the dollar, corresponding to the backward pace of policy tightening of the ECB and the Japanese Central Bank. Since the beginning of this year, the dollar has risen more than 10% against the yen, more than 5% against the euro, and the yen has even continued to hit a new 20-year low in the near future. At the same time, the safe-haven demand brought about by the Russian-Ukrainian conflict has also added to the charm of the dollar, especially given the continued drag on the European economy by the war, and even if the ECB has the opportunity to raise interest rates in the second half of the year, uncertainty will still accompany the fluctuations of the euro. The yen will remain lower driven by differences in monetary policy between the Fed and the Bank of Japan.
CITIC Futures proposed in the latest report that the performance of the dollar index this year depends on the game of three forces:
- There is still more room for the Fed to raise interest rates and tighten the amplitude and rhythm than expected, and the larger the space, the greater the upward pressure on the dollar index;
- In the context of the global economic downturn, the dollar index is easy to rise and fall, which is the most certain;
- The less pressure the geopolitical conflict will put on the eurozone economy, the smoother the normalization of monetary policy in the eurozone, and the greater the downward pressure on the dollar index.
The report also said that where the upper limit of the dollar index is implemented this year will depend more on the tearing between force one and force three.
The report also deduces three scenarios for capping the dollar index:
- The first (benchmark situation): to the Federal Reserve in May and June each raised 50bp, in June to open the balance sheet reduction + the European Central Bank in June to clearly reduce the specific decision to reduce the purchase of bonds, the euro area economy did not fall into recession as a benchmark situation, to 2016-2017 as a coordinate, the dollar index rushed up to 103-105, the inflection point may be in mid-June;
- Second: in the case of the Fed being more hawkish than the benchmark + the eurozone is in recession, the dollar index may break through 105;
- Third: in the case of the Fed's actual path is not as good as the benchmark situation Hawkish + eurozone economy has not fallen into recession, the dollar index will be difficult to reach 103.
However, the Wall Street Journal said that some people expect the dollar to lose power in the next year. They argue that the downturn in the stock market and one-off events in Europe, including the French presidential election, drove a sharp rise in the dollar this month. Some investors are buying derivatives pegged to the yen, which is equivalent to betting that the dollar has peaked and will not exceed a certain level. These investors are buying reverse knock-outs, which would be worthless if the dollar moved sharply higher.
Jeff Yarmouth, global co-head of FX liquid derivatives trading at UBS Group, said: "Many of the trades that people make are questioning whether the dollar can sustain its rally after it rises above a certain level. ”
The renminbi remains resilient
Although the dollar index plunged sharply higher for two consecutive days and then fell sharply, the onshore yuan continued to fall against the dollar on Thursday.
On April 21, the spot exchange rate of the renminbi against the US dollar closed at 6.4500 at 16:30, down 347 basis points or 0.54% from the previous session.
This is the second consecutive trading day in which the spot exchange rate of the renminbi against the US dollar has fallen sharply. The cumulative decline in two trading days is more than 1.1%.
The day before, the onshore yuan closed at 6.4153 against the dollar, down 375 points from the previous day and at a new low since October 18, 2021.
CICC's April 20 release "How to View the Recent Depreciation of the RMB Exchange Rate?" The short-term triggers for the rapid upside of USD/YUAN include a breakout at the key point of 6.40, a strong dollar trend, and a mid-month foreign exchange buyer's order.
CITIC Securities pointed out that the pressure on the depreciation of the RMB exchange rate has increased, mainly from the downward pressure on economic fundamentals caused by the new crown epidemic and the strengthening of the US dollar.
First of all, the most important factor in economic fundamentals is that the epidemic led by Aumicron has occurred in key economic cities and spread rapidly, triggering global concerns about China's supply chain. Coupled with the economic prosperity of foreign countries such as the euro area and the United States continued to decline under the pressure of high inflation and monetary policy tightening, overseas demand fell further, and concerns about mainland exports have increased, and the current PMI new export orders have declined or reflected that there is some pressure on the renminbi in the future. Second, the current RMB exchange rate is facing upward pressure on the US dollar index. The Fed's faster tightening cycle has pushed funds back to the United States, the dollar index has strengthened, and the stronger dollar has posed passive depreciation pressure on the renminbi through the transmission path of "dollar index - basket currency exchange rate - renminbi mid-price - renminbi spot exchange rate".
Lin Mingtian told the "International Finance News" reporter that the momentum of the decline in the renminbi is expected to dominate the market in the short term. But in the longer term, as the Fed's move to raise interest rates is digested and the trend of China's 10-year Treasury bonds itself is flat, the passive narrowing of the US-China spread will be alleviated.
Lin Mingtian also said that in addition to the different economic cycles between China and the United States, part of the reason for the pressure on the renminbi is also due to the impact of the epidemic in China, if the epidemic ushers in an inflection point, it means that the market will regain confidence, and in the face of potential economic pressure, investors still have expectations for the central bank to take more easing measures in the future, which can be used as a boost to the rebound of the renminbi.
China Merchants Securities Research Report also believes that maintaining the basic judgment of the RMB exchange rate is short and short. The interest rate differential caused by the differentiation of Sino-US economic fundamentals and monetary policy is narrowed or even inverted, and it is difficult to quickly reverse, and the pressure of international capital outflows and the depreciation of the RMB exchange rate will still exist, and it is necessary to exert the flexibility of the RMB exchange rate to maintain the effectiveness of the mainland's monetary policy. Throughout the year, the dollar index will rise and fall, and the RMB exchange rate will regain its momentum.
This article originated from the International Finance News