The renminbi rose above 7.17 against the US dollar, hitting a three-month high

The upward momentum of the RMB exchange rate against the US dollar, which began last week, continues.

On Monday, November 20, the onshore RMB exchange rate against the US dollar regained the 7.19 and 7.18 marks one after another, closing at 7.1747 as of 16:30 Beijing time. The offshore yuan rose more than 500 points against the US dollar during the day, reaching as high as 7.1659.

What are the factors driving the strengthening of the RMB exchange rate?

Jones Lang LaSalle China Chief Economist Pang Ming told reporters that the recent strengthening of the RMB exchange rate is mainly driven by three factors: the reduction of geopolitical pressures, the convergence of monetary policy trends in China and the United States, and the improvement of China's macroeconomic data.

While the RMB exchange rate is rising, how long this rise can last has become a topic of concern for the market. A number of exchange rate analysts predict that the RMB exchange rate may still have room for further growth.

What factors drive

On November 17, the onshore yuan rose more than 500 points against the US dollar during the day, once rising above 7.2 to 7.1911, hitting a new high since early August, causing market concern.

On November 20, the RMB exchange rate continued the momentum of the previous week. As of 16:30 Beijing time, the RMB closed at 7.1747 against the US dollar, up 718 points from the previous trading day, and at around 17:40, the onshore and offshore RMB expanded against the US dollar, both rising above 7.17, up more than 800 basis points and 500 basis points respectively during the day.

For the factors driving the strength of the RMB, Pang Ming analyzed that first, the meeting between the heads of state of China and the United States released a positive signal, and geopolitical uncertainty was greatly eliminated; second, the inflation in the United States fell more than expected in October, and the necessity of further interest rate hikes by the Federal Reserve in December weakened, while China's MLF excess parity continued and the LPR in November "stood still" Third, China's macro data in October were positive, the main indicators of the national economy continued to improve, the economy operated smoothly on the whole, and the fundamentals provided a solid foundation and backing for the RMB exchange rate.

In mid-November, Wang Tao, head of Asian economic research and chief China economist at UBS, predicted that the dollar could weaken and the renminbi could appreciate slightly. Wang Tao believes that due to the continued strength of the US dollar, the RMB will depreciate against the US dollar for most of 2023, but it has stabilized at around 7.3 recently, partly due to the recent recovery of domestic demand bottoming out and the signs of improvement in exports. As U.S. interest rates are likely to remain higher for longer and the U.S. dollar remains relatively strong in the near term, the RMB is expected to fluctuate around 7.3 against the U.S. dollar in 2023 and early 2024. Despite the relatively weak economic growth, the PBOC is not expected to use the depreciation of the renminbi as a policy tool to boost exports and economic growth, but will focus more on the market's confidence and stability in the renminbi exchange rate.

According to statistics from Guojin Securities, from November 13 to November 17, the euro, the British pound, the Japanese yen and the Canadian dollar appreciated against the US dollar by 2.1%, 2.0%, 1.3% and 0.6% respectively. The onshore and offshore renminbi appreciated by 0.8% and 0.9% against the US dollar to 7.2 and 7.2 respectively.

"I think it's mainly because of the changes in the international foreign exchange market environment. Regarding the recent rise in the RMB exchange rate, Zhao Qingming, vice president of the China Cross-border Finance Research Institute, believes that the strengthening of the RMB exchange rate since last week is mainly due to external reasons. From the perspective of the global foreign exchange market, the US dollar has seen a significant decline, and non-US dollar currencies have risen to varying degrees. Judging from the increase in non-US currencies, the increase in the RMB is in the middle, which is roughly the same as the yen, the euro and the pound.

Zhao Qingming also said that from an internal point of view, there has been a marginal improvement in domestic economic fundamentals, which also supports the exchange rate.

Has the exchange rate inflection point arrived?

Since 2023, the RMB exchange rate has roughly gone through several stages: it rose at the beginning of the year, started a depreciation market in February, started a new round of depreciation in May, and stabilized at around 7.3 for most of the time, and since November, it has begun to fluctuate and appreciate.

Has the renminbi exchange rate reached an inflection point? Is the recent rapid appreciation of the renminbi the beginning of a "change" or a staged rebound under the easing of pressure on the US dollar?

Zhao Wei, chief economist of Guojin Securities, clearly believes that the recent strengthening of the exchange rate is the beginning of the "change". The "signal" of the change is that the derivatives market has released a positive signal and the market behavior has begun to improve marginally.

First of all, Zhao Wei believes that the strength of the forward exchange rate and the decline of the risk reversal factor have released signals that the RMB will continue to appreciate. In the forward market, that is, a sharp decline in the dynamic correlation of forwards, it often means the beginning of a "change", and since September, when the spot exchange rate of the renminbi is still fluctuating at the 7.3 mark, the forward exchange rate has "turned" in advance. In the options market, lower implied volatility mostly indicates that the inflection point of the exchange rate is approaching, and recently, implied volatility fell below 5% on October 13, and the risk reversal factor also fell rapidly.

Secondly, Zhao Wei analyzed that market behavior is also tilting in the direction of favoring the RMB. In October, the exchange rate for export receipts increased from 0.86 to 0.93, and the exchange rate for import payments fell from 1.06 to 1.01; the willingness of enterprises and residents to settle and sell foreign exchange improved marginally, and the deficit in foreign exchange settlement and sales by banks on behalf of customers narrowed from $19.4 billion to $8.1 billion. In terms of capital, overseas debt holdings increased by 37.3 billion yuan in October, and the scale of northbound capital outflow in November also slowed down from the monthly average of 57.3 billion yuan in the previous three months, with only an outflow of 5.2 billion yuan.

"If we say it's an inflection point, I can broadly agree with that. Zhao Qingming believes that the dollar index is easy to fall in the coming period, and it is very difficult to rise to this year's high, and there is a high probability that it will fall. In this case, major non-US currencies such as the euro, the British pound, the Japanese yen, and the yuan should strengthen against the US dollar to varying degrees. "This inflection point should be said to be a change between the US dollar and the non-US dollar. Zhao Qingming analyzed.

There is room for further uplifting

As for the next exchange rate trend, Zhao Qingming told reporters that on the one hand, from the perspective of the international foreign exchange market, it is necessary to look at the trend of the dollar index, the dollar is strong, the non-United States is necessarily weak, the dollar is weak, and the non-United States is strong; on the other hand, from the domestic point of view, China's economy is bound to stabilize and rebound, and if the domestic economy is uncertain, it will inevitably fluctuate in the exchange rate.

CICC's foreign exchange research team believes that considering that the RMB exchange rate has broken through an important technical threshold, it is judged that the RMB exchange rate still has room for further growth. The integer point of 7.20 and the level of the median price around 7.17 will be important references. Taking into account the reflexive force of seasonality and the exchange rate bottoming out, the RMB may have a high probability of rebounding to the level of the central parity, realizing the integration of the central parity, the onshore exchange rate and the offshore exchange rate. Of course, further appreciation will require further warming of the domestic economy. It is necessary to closely track the pace and intensity of further introduction of demand-side support policies before the end of the year.

"We expect the U.S. economy to slow in 2024 and the Fed to start cutting interest rates. At the same time, China's economic growth is expected to stabilize, and the People's Bank of China (PBOC) will not cut interest rates after next spring. Wang Tao said that the expected narrowing of the yield spread between Chinese and US government bonds, the expected weakening of the US dollar, and the restoration of confidence in China's economy will jointly promote a slight appreciation of the yuan against the US dollar. It is expected that the USD/RMB exchange rate will reach 7.15/7.00 by the end of 2024/2025, respectively.

On November 16, the General Department of the State Administration of Foreign Exchange issued a special column article "Orderly Promoting Reform and Opening-up in the Foreign Exchange Field to Promote Cross-border Trade and Investment and Financing Facilitation", stating that in the next stage, it is necessary to continuously improve the foreign exchange management system and mechanism to better serve the high-quality development of the real economy.

Li Lifeng, deputy director and chief strategic analyst of Huaxi Securities, believes that the RMB exchange rate has stabilized, helping the A-share market at the end of the year. The basis for its analysis is that with the decline in US inflation and the weakening of the US dollar index, the market continues to trade "the end of the Fed's interest rate hike", and global risk assets ushered in a respite. The economic data in October showed that the domestic demand side is still insufficient, and under the policy tone of "cross-cyclical and counter-cyclical adjustment", the fiscal policy will be forward-looking, and the monetary policy will also be loose. At present, the RMB exchange rate has returned to the level of August, the constraints of exchange rate depreciation on monetary policy have been significantly eased, and the warming of diplomatic relations between major countries has increased, and the possibility of foreign capital returning to net inflow is increasing, helping the continuation of the year-end market of A-shares.