From the perspective of domestic factors, domestic economic fundamental factors such as the monetary policy and foreign trade trend of the People's Bank of China will become the key factors that will dominate the direction of the renminbi in the future
Figure/IC
Wen | Zhang Weilong, a special correspondent of Caijing
Editor| Zhang Wei yuan man
On August 29, the onshore and offshore renminbi fell below 6.9207 and 6.9282 against the US dollar, respectively, the lowest point in the past two years, and depreciated by about 7.5% from mid-April.
Behind the continuous depreciation of the renminbi is the continuous strengthening of the dollar index. On the same day (August 29), the dollar index rose to a new high of 109.20 since mid-July this year.
In two weeks, the renminbi has fallen by nearly 1,500 points. An important driver of the renminbi's break below the 6.9 mark this week was that Fed Chairman Jay Powell broke market hopes that the Fed would slow down the pace of interest rate hikes. "The Fed must continue to raise rates and keep interest rates higher until it is confident that inflation is under control." Powell said.
Powell's remarks were made during the just-concluded Jackson Hole Annual Meeting of Global Central Banks. "While the Fed's measures to slow down the pace of investment, spending and hiring will drive inflation down, it will also cause some pain for households and businesses." These are the unfortunate costs associated with reducing inflation. But if price stability is not restored, it will bring even greater suffering. He said.
Yuan Tao, a senior foreign exchange analyst at Dongzheng Futures, believes that the Fed's monetary policy and the trend of the euro will have a direct impact on the DOLLAR index. Powell has vowed to "hold on" to the rate hike until U.S. inflation returns to its 2% target level, which will drive the dollar index higher. From the perspective of domestic factors, domestic economic fundamental factors such as the monetary policy and foreign trade trend of the People's Bank of China will become the key factors that will dominate the direction of the renminbi in the future.
Powell's interest rate hike statement
Powell's recent tougher approach to fighting inflation has been more assertive than last year's hesitation about raising interest rates.
During the annual meeting of global central banks in Jackson Hole, he cited the lesson the Fed had learned in the 1970s: to ease policy prematurely to boost economic growth before inflation had slowed sufficiently. Powell said the Fed would avoid such an outcome.
Powell also said that another lesson left by the Fed is that the public's expectations of future inflation will play an important role in the inflation path over a set period of time, "inflation is partly due to itself, and part of the work must be done to get the economy back to a more stable and productive state."
Powell's statement made the market more confident about the Fed's interest rate hikes and tightening monetary policy, and led to a global sell-off of risk assets. On the 26th, the U.S. benchmark stock index P500 closed down more than 3%, the biggest decline since June.
Inflation and employment are the two most important targets of the Fed's monetary policy. In Yuan Tao's view, the reason why Powell does not want to repeat the mistakes of the "Volcker era" is because rather than adopting a hawkish monetary policy, allowing inflation to repeat will bring more far-reaching harm to the US economy and financial markets. "Inflation in the U.S. is currently at a 40-year high, core inflation remains high, and unemployment is at a half-century low, and the unemployment rate data provide confidence for Powell's continuous rate hikes." Yuan Tao said.
From May to July, the U.S. Consumer Price Index (CPI) rose 8.6 percent, 9.1 percent and 8.5 percent year-on-year, respectively, on a seasonally adjusted basis, according to the U.S. Department of Labor. In terms of segments, the core CPI rose 5.9% year-on-year in July after excluding food and energy prices, given the rise in rental and service prices.
In July, U.S. non-farm payrolls data beat expectations, with both the unemployment rate and labor force participation falling slightly. In July, 528,000 new non-farm payrolls were created, and the unemployment rate fell by 0.1 percentage points to 3.5%.
Aneta Markowska, Chief Economist at Jefferies, said there are four major drivers of the current U.S. price increase, namely commodity prices, supply chain challenges, housing and labor shortages. The upward effects of the former two on inflation are fading, yet housing and labor shortages will continue to be reflected in service inflation, which "won't disappear anytime soon until the Fed tries to 'destroy' demand."
Will the renminbi break 7?
Some market analysts believe that the RENMINBI may break 7 in the future. The reason for this is that the Fed will adopt a more aggressive interest rate hike policy, which, combined with the negative side of the dollar index, the euro, will continue to decline, which will drive the dollar index further strengthen. On the domestic front, subject to the rebound of the epidemic, the disposal of financial risks, the slowdown in economic recovery and other factors, the Central Bank of China is not expected to adopt a more tight monetary policy, and the renminbi will continue to weaken. Bank of America predicts that by the end of the year, the onshore yuan could fall below 7 against the dollar.
During the annual meeting of global central banks in Jackson Hole, Powell did not directly comment on the prospects for the Fed's September policy meeting, which is about to raise rates by 75 basis points or 50 basis points. But in the view of Brian Kennedy, portfolio manager at Loomis Sayles, the theory that the Fed has turned dovish has been overturned. "This further confirms that the Fed does not believe that inflation is obediently conceding defeat to rate hikes and pulling back towards the 2% target." He said.
Bob Michele, head of the global fixed income, foreign exchange and commodities division at JPMorgan Asset Management, said: "One thing could not be clearer: they will continue to raise interest rates and shrink central banks' balance sheets until they have significantly reined in inflation. The fantasy that they will start cutting rates two or three months after their last hike would be nonsense. ”
The Chicago Mercantile Exchange's Fed Watch tool shows that traders predict a 29.5 percent probability of announcing a 50 basis point rate hike after the Fed's monetary policy meeting on Sept. 22, and a 70.5 percent probability of a 75 basis point hike.
Yuan Tao believes that from the perspective of domestic factors, the monetary policy of the People's Bank of China and the fundamentals of the domestic economy will become the decisive factors affecting the RMB exchange rate. "But with weak loan demand and bleak economic data, the PBOC's incentive to tighten liquidity is not strong." He said.
At present, the willingness to credit in the real economy is relatively low, and the economic vitality is insufficient. Data released by the People's Bank of China on August 12 showed that new RMB loans were 679 billion yuan in July, an increase of 404.2 billion yuan less than that of a year-on-year increase; The increase in the scale of social financing in July was 756.1 billion yuan, an increase of 319.1 billion yuan less than that of the same period last year.
According to the National Bureau of Statistics, in July, the added value of industries above designated size increased by 3.8% year-on-year in real terms, and the expected value was 4.6%. In July, the total retail sales of consumer goods totaled 3,587 billion yuan, an increase of 2.7% year-on-year, and the expected value was 5%.
However, in Yuantao's view, China's foreign trade export situation is better, and the depreciation of the renminbi will be conducive to exports, which will provide strong support for the renminbi exchange rate.
Zhao Tonglu, director of the Department of National Accounts of the National Bureau of Statistics, said that net exports have increased the role of net exports in china's economy. In the first half of the year, net exports of goods and services drove economic growth by 0.9 percentage points. Among them, the net export of goods and services in the second quarter drove the economic growth of the quarter by 1.1 percentage points. According to the State Administration of Foreign Exchange, China's current account surplus was US$80.2 billion in the second quarter of 2022, and in the first half of 2022, China's current account surplus was US$169.1 billion.
If the renminbi falls below 7 from 6.9, will regulators take action? Banks, including HSBC, expect China's central bank to reduce the foreign exchange reserve ratio of financial institutions, tighten controls on the mid-price of the renminbi, or increase the issuance of offshore renminbi bills to curb the depreciation of the renminbi.
According to media reports, in recent times, some banks have received more guidance from the window of the Central Bank of China due to the purchase of foreign exchange in US dollars.
The State Administration of Foreign Exchange said that the current china settlement and sale of foreign exchange market is running smoothly, and since August, banks have shown a double surplus in foreign exchange settlement and sales and foreign-related receipts and payments, and there has been no irrational large number of foreign exchange purchases by institutions. "At present, the participants in the mainland foreign exchange market are more rational, maintaining the trading mode of 'settling foreign exchange at a high level', and the exchange rate is expected to be stable, which will help the RMB exchange rate to remain basically stable at a reasonable and balanced level." SAFE said.