Breaking "7" for 7 consecutive months, the RMB exchange rate has strengthened recently, experts: there is a high probability of returning to "7" next year

Source of this article: Times Finance Author: Li Yiwen

As the end of the year approaches, the RMB exchange rate against the US dollar has still not returned to within "7".

On December 25, the People's Bank of China authorized the China Foreign Exchange Trade System to announce that the central parity of the RMB exchange rate in the interbank foreign exchange market was: 1 US dollar to 7.1010 yuan, compared with 7.0953 yuan on the previous trading day, a single-day decrease of 57 basis points.

The onshore and offshore RMB exchange rates rebounded slightly, fluctuating around 7.13. On December 25, the onshore yuan closed at 7.1346 against the US dollar, up 47 points from the previous day's close, and the offshore yuan was quoted at 7.1476 against the US dollar, basically unchanged from the previous day's close.

In fact, since November, the RMB exchange rate against the US dollar has rebounded significantly. The onshore and offshore RMB exchange rates against the US dollar continued to climb for many days, and broke through many thresholds such as 7.21, 7.20, 7.19 and 7.18. Among them, on December 14, the onshore RMB exchange rate against the US dollar rose by more than 600 points during the day, once breaking the 7.10 mark and touching 7.0955, but then fell back.

Since the 811 exchange rate reform in 2015, the offshore RMB has broken "7" three times, in August 2019, February 2020 and September 2022. The first two of these took five months to stabilize the exchange rate below "7" for a long time, and last year it took three months. It has been more than 7 months since the RMB broke "7" in this round.

In this regard, a number of industry insiders told Times Finance that the slow recovery of the RMB exchange rate against the US dollar is mainly caused by the "diametrically opposed" monetary policies of China and the United States, and there are worries about future economic growth in the market. With the strengthening of the Fed's interest rate cut expectations and the recovery of China's economy, the RMB is likely to return to the "7" level next year.

Image source: Picture Worm Creative

Two-way fluctuations in the renminbi are normal

Judging from the trend, the RMB exchange rate against the US dollar fluctuated frequently this year, and rose rapidly after falling down.

At the beginning of the year, there was a brief recovery in the renminbi exchange rate against the US dollar. In January 2023, affected by factors such as the weakening of the US dollar and the strengthening of economic expectations, the RMB regained the 6.70 mark and then fluctuated and fell, and then remained in the range of 6.8 and 6.9. However, with the strong rebound of the dollar index, which rose by 2.5% in May alone, the renminbi showed a wave of significant decline, which made the renminbi exchange rate fall into the 7 range again, once bottoming out at 7.26.

In July, as the Fed became more and more vague about the interest rate hike policy, and after a series of domestic stimulus policies landed, the economic recovery accelerated, and the RMB exchange rate rebounded in a small wave. However, the rally failed to sustain. At the end of July, the Federal Reserve announced another 25 basis point interest rate hike and made a hawkish statement, hitting the market's interest rate cut forecasts, the dollar index strengthened rapidly, and the RMB exchange rate fell again, and long-term sideways fluctuations around the 7.3 mark, the lowest touched 7.35.

After November, the RMB exchange rate strengthened rapidly, recovering the "7.3" and "7.2" marks one after another, and broke through the "7.1" mark intraday on December 14, of which the onshore RMB reached a maximum of 7.0955. However, the RMB has recently experienced lower volatility against the backdrop of a lower dollar index.

In 2023, the onshore yuan fluctuated at a high frequency and moved lower, but it recovered strongly at the end of the year

Since the beginning of this year, the fluctuation of the RMB exchange rate against the US dollar has intensified significantly, which has aroused great concern in the market.

According to the "China Monetary Policy Implementation Report for the Third Quarter of 2023" released by the People's Bank of China, the annualized volatility of the RMB exchange rate against the US dollar was 5.1% in the first three quarters. In the past five years, the RMB has fluctuated at an average of about 4% against the US dollar.

In addition, according to the analysis of Guan Tao, global chief economist of Bank of China Securities, in the first half of 2023, the maximum amplitude of the central parity of the RMB exchange rate will be 7.6%, exceeding the 3.5% amplitude in the whole of 2021. During the same period, among the eight major reserve currencies disclosed by the International Monetary Fund (IMF), the maximum amplitude of the renminbi ranked fourth, exceeding the average maximum amplitude of the exchange rates of the other seven major reserve currencies in the same period, and for the first time since the exchange rate merger in early 1994. 

"This is mainly related to the shock of the dollar index. Tan Yaling, president of the China Foreign Exchange Investment Research Institute, told Times Finance that the high-frequency fluctuations in the RMB exchange rate against the US dollar this year have been largely affected by the US dollar index, and the Fed's interest rate hike policy is uncertain, affecting market forecasts and causing short-term fluctuations in the exchange rate market. However, Tan Yaling also reminded that the repair of the domestic basic economy is also an important reason for determining the trend of the RMB.

In 2023, the dollar index will also be volatile

In fact, the mainland's financial regulatory authorities have repeatedly stressed that such two-way fluctuations in the renminbi are a normal phenomenon.

Previously, the People's Bank of China mentioned in the article "Deepening the Market-oriented Reform of the Exchange Rate" that the People's Bank of China has steadily deepened the market-oriented reform of the exchange rate, continuously improved the managed floating exchange rate system based on market supply and demand, adjusted with reference to a basket of currencies, the market-oriented level of the RMB exchange rate has been continuously improved, market supply and demand have played a decisive role in the formation of the exchange rate, the flexibility of the exchange rate has been continuously enhanced, two-way fluctuations have become the norm, and the RMB exchange rate has remained basically stable at a reasonable and balanced level.

Guan Tao also said that the increase in the flexibility of the RMB exchange rate has improved the autonomy of interest rate regulation and promoted macroeconomic stability; The stability of economic fundamentals supports the stability of the exchange rate, and the operation of the foreign exchange market is more resilient, which is conducive to the formation of a positive interaction between interest rates and exchange rates.

It is a high probability to return to within "7".

Objectively speaking, the RMB exchange rate against the US dollar has been breaking "7" for 7 months since May, and has fluctuated and fallen recently, can the RMB exchange rate return to "7" in 2024?

In this regard, Ying Xi, head of the research department of the International Research Department of the People's Bank of China, explained to Times Finance that the recent fluctuation of the RMB is a normal phenomenon at the end of the year.

"Referring to past experience, at the end of each year, importers and exporters will rush to use the remaining exchange quota at the end of the year to avoid the waste of indicators, so the RMB itself has greater downward pressure at the end of the year. Ying Xi further pointed out that at the end of this year, the dollar index was at a low level in the year, making the exchange of foreign currency more affordable. In addition, the current interest rates in China and the United States are still inverted, and the yields of some overseas wealth management products are also relatively at historical highs, which further strengthens the momentum of exchange exchange at the end of the year.

In Ying Xi's view, compared with before, with the Fed's interest rate cut expectations and the recovery of the domestic economy, the domestic and foreign environment of the RMB has changed greatly, and the exchange rate of the RMB against the US dollar will return to within "7" next year, with a greater probability, "The current decline in the RMB is a seasonal adjustment and cannot be used as a basis for bears." ”

Ying Xi also reminded that after January 1, 2024, there will be a new wave of exchange rate quotas, and as the traditional Chinese New Year approaches, enterprises may have a new round of centralized exchange exchange for normal operations such as foreign exchange settlement or payroll, and the RMB may fluctuate at that time.

Ying Xi believes that the market does not need to worry too much about the value of the RMB. He explained that this year's international situation is complex and changeable, the global foreign exchange market is relatively volatile, and compared with the currency trends of the world's major economies, the trend of the RMB is still within the normal range.

In fact, judging from the CFETS RMB exchange rate index, which represents the exchange rate of a basket of currencies, the decline in the value of the RMB has been relatively moderate since the beginning of this year. According to data from China Money Network, on December 22, 2023, the CFETS RMB exchange rate index was 97.88, compared with 98.67 on December 30, 2022.

Although the CFETS RMB exchange rate index has fluctuated, it has declined more slowly than at the beginning of the year

There are also more and more signs that the Fed will start cutting interest rates in 2024. On December 14, Beijing time, the Federal Reserve concluded its last interest rate meeting this year and announced that it would keep the target range of the federal funds rate unchanged between 5.25% and 5.5%. The Fed's new economic projections showed that Fed officials have a median expectation of 75 basis points for a rate cut in 2024, up from the 50 basis points expected before the meeting. Fed Chair Jerome Powell expressed the view after the meeting that the rate hike cycle is "at or near peak" as it is "unlikely" for the committee to raise rates again.

The inflation rate, which is the focus of the Fed's control, has entered a moderate downward trend. According to the latest data released by the U.S. Bureau of Labor Statistics, the U.S. CPI, one of the main indicators of inflation, rose 3.1% year-on-year in November, slowing from 3.2% in October, in line with expectations.

Guan Tao also believes that the current global financial cycle led by the Fed's monetary policy has reached the end of tightening. However, Guan Tao also cautioned that it needs to be taken into account that the uncertainty of the Fed's monetary policy may lead to a sudden change in the situation.

Tan Yaling also believes that there is a high probability that the RMB will rebound next year, but the market should not bet too much on the Fed to cut interest rates. Tan Yaling said that the current Red Sea and the Suez Canal have a new geopolitical shock, which may trigger an increase in international oil prices, and as an important indicator in the US CPI, once the oil price rises sharply, US inflation may rebound again, and the Fed's interest rate cut may be postponed again.

Although a number of economists believe that the exchange rate of the renminbi against the US dollar will most likely have a chance to return to within the "7" range next year, the key to whether the exchange rate can stabilize within the "7" lies in the repair situation of China's economy.

In Guan Tao's view, the current consumption vitality of Chinese residents is gradually recovering, domestic structural employment pressure may be gradually easing, the demand for replenishment in Europe and the United States may bring about an improvement in exports, policy optimization and implementation are expected to drive the further repair of residents' leveraged behavior, and the interest rate differential between China and the United States has peaked and fallen, which will help reduce the pressure on capital outflow and improve market confidence. In 2024, China's economy will recover well, but it does not rule out the downward pressure on the economy caused by factors such as land finance and weak social expectations.

Ying Xi Wen also reminded that although the fundamentals of China's property market have changed, and it is impossible to expect the property market to significantly boost China's economy in the future, in 2024, China's economy still needs to focus on the property market, "at least to stop the decline and pick up, so as to protect people's livelihood and stabilize residents' confidence." ”