:Zhang Yu, Deputy Director and Chief Macro Analyst of Huachuang Securities Research Institute (License No.: S0360518090001)
联系人：夏雪（微信 SuperSummerSnow）
Summary of the report
On December 29, 2023, the China Foreign Exchange Trade System (CFETS) announced the adjustment of the weights of the CFETS RMB Exchange Rate Index currency basket. The new version of the index will take effect from 1 January 2024.
1. What are the changes in the weight of the CFETS basket in 2024?
Since 2017, CFETS has evaluated CFETS' currency basket once a year, and since 2020, the currency weights have been adjusted at the end of each year, and the new weights will be applied to the following year. The weights are adjusted on the basis of changes in trade shares.
The 2023 CFETS data is based on the 2021 trade data, and the new 2024 CFETS data is based on the 2022 trade data. The main changes are:
1. The weight of the basket is still relatively concentrated in the currencies of several major trading partners, but the marginal decline in concentration is significant (Figure 1). CR5 is 61.05%, down 2.34 percentage points from 2023.
2. Among them, the currency weights of major trading partners in traditional developed markets declined (Figure 2). Corresponding to the change in the relative share of trade, the currency weights of traditional trading partners such as the United States, the European Union, Japan, and South Korea have been lowered, decreasing by 0.37%, 0.13%, 0.79%, and 0.46% to 19.46%, 18.08%, 8.96%, and 9.05%, respectively, compared with 2023.
3. The currency weights of major trading partners in emerging markets have increased significantly (Figure 2). The weights of the currencies of Russia, Saudi Arabia, the United Arab Emirates, Malaysia and other countries have been raised, increasing by 0.75%, 0.5%, 0.49% and 0.47% to 4.6%, 2.79%, 2.39% and 5.11% respectively in 2023.
4. In the long run, among the major developed market currencies, the weights of the US dollar, the Japanese yen and the South Korean won continued to decline, the weight of the euro rose first and then fell, and the weight of the Australian dollar fluctuated (Figure 3), while the weights of major emerging market currencies showed a fluctuating upward trend, including the Malaysian ringgit, the Russian ruble, the Thai baht, the Saudi riyal, the Mexican dollar, and the UAE dirham (Figure 4).
2. What are the changes in the analytical framework of the internal and external market linkage of the RMB exchange rate under the new weights?
According to the above CFETS index compilation formula, the "internal and external market linkage analysis framework" of the RMB exchange rate can be derived, namely:
Change in CFETS + change in the central parity of USD/RMB = weighted value of changes in currencies in the external market
Substituting the weights of each currency in 2024 yields the coefficients of the internal and external linkage analysis framework of the RMB exchange rate under the new weights (Figure 5).
1. Under the new weight, the impact coefficient of the fluctuation of the US dollar index on the central parity of the RMB has further declined.
Under the new weight, the weight of the currencies in the US dollar index basket in the CFETS basket has declined, resulting in a further slight decrease in the impact coefficient of the US dollar index on the central parity of the US dollar against the yuan, with the impact coefficient falling from 0.348 to 0.341, which means that the US dollar index actively appreciates by 1% (that is, the US dollar appreciates by 1% against all currencies in the US dollar index basket at the same time), and the depreciation pressure of the RMB against the central parity of the US dollar has decreased from 0.348% to 0.341% (Figure 6), which is the third consecutive year of decline.
2. Under the new weight, the stress test results of RMB depreciation brought about by the fluctuation of the US dollar index:
As shown in Figure 7, under the new weight, the US dollar index has "actively appreciated" from the current price level of 103.23 by about 3.4% to about 106.8, which brings about 1.2% depreciation pressure to the central parity of the US dollar against the renminbi by about 1.2%, corresponding to the depreciation of the central parity of the renminbi from the current 7.12 to around 7.2.
3. Review of important overseas data and high-frequency data tracking
1. The market expects interest rate hikes/cuts by the central banks of the United States, Europe and Japan
See Figure 8. Market expectations(1) for the Fed have changed little this week compared to last Friday, with Fed funds futures pricing in the Fed to cut rates starting in May and cutting rates 5.4 times for the year. (2) The change in expectations for the European Central Bank's interest rate cut has risen marginally. The first rate cut is expected in June, with a one-time cut of 50bps. There were 5.7 rate cuts for the year, and last week 5.3 rate cuts were expected for the year. (3) Expectations for the Bank of Japan's interest rate hike have increased. The first rate hike is expected in June, with 2.3 rate hikes throughout the year.
2. Review of major economic data
1) A number of U.S. economic data exceeded expectations, showing economic resilience. For example, on the consumption side, retail sales in December were 0.6% month-on-month (Bloomberg consensus estimate of 0.4%), the University of Michigan consumer sentiment index was 78.8 in January (Bloomberg consensus estimate of 70), on the production side, industrial production in December was 0.1% month-on-month (Bloomberg consensus estimate of 0%), and in real estate, the annualized total of housing starts in December was 1.46 million units (Bloomberg consensus estimate of 1.43 million).
2) Eurozone industrial production fell short of expectations, with November industrial production -6.8% y/y, Bloomberg consensus forecast of -5.9%, and the previous value of -6.6%.
3) Japan's inflation was in line with expectations, with core CPI of 2.3% year-on-year in December, in line with Bloomberg consensus expectations and 2.5% previously.
Risk warning: The exchange rate formation mechanism has been greatly reformed, and China's trade structure has fluctuated significantly
Table of Contents of Reports
The main body of the report
1. What are the changes in the weight of the CFETS basket in 2024?
Since 2017, CFETS has evaluated CFETS' currency basket once a year, and since 2020, the currency weights have been adjusted at the end of each year, and the new weights will be applied to the following year. The weights are adjusted on the basis of changes in trade shares.
The 2023 CFETS data is based on the 2021 trade data, and the new 2024 CFETS data is based on the 2022 trade data. The main changes are:
1. The weight of the basket is still relatively concentrated in the currencies of several major trading partners, but the marginal decline in concentration is significant (Figure 1). CR5 is 61.05%, down 2.34 percentage points from 2023.
2. Among them, the currency weights of major trading partners in traditional developed markets declined (Figure 2). Corresponding to the change in the relative share of trade, the currency weights of traditional trading partners such as the United States, the European Union, Japan, and South Korea have been lowered, decreasing by 0.37%, 0.13%, 0.79%, and 0.46% to 19.46%, 18.08%, 8.96%, and 9.05%, respectively, compared with 2023.
3. The currency weights of major trading partners in emerging markets have increased significantly (Figure 2). The weights of the currencies of Russia, Saudi Arabia, the United Arab Emirates, Malaysia and other countries have been raised, increasing by 0.75%, 0.5%, 0.49% and 0.47% to 4.6%, 2.79%, 2.39% and 5.11% respectively in 2023.
4. In the long run, among the major developed market currencies, the weights of the US dollar, the Japanese yen and the South Korean won continued to decline, the weight of the euro rose first and then fell, and the weight of the Australian dollar fluctuated (Figure 3), while the weights of major emerging market currencies showed a fluctuating upward trend, including the Malaysian ringgit, the Russian ruble, the Thai baht, the Saudi riyal, the Mexican dollar, and the UAE dirham (Figure 4).
2. What are the changes in the analytical framework of the internal and external market linkage of the RMB exchange rate under the new weights?
The CFETS index is a weighted geometric average, i.e.:
According to the above CFETS index compilation formula, the "internal and external market linkage analysis framework" of the RMB exchange rate can be derived, namely:
Substituting the weights of each currency in 2024 yields the coefficients of the internal and external linkage analysis framework of the RMB exchange rate under the new weights (Figure 5).
1. Under the new weight, the impact coefficient of the fluctuation of the US dollar index on the central parity of the RMB has further declined.
Under the new weight, the weight of the currencies in the US dollar index basket in the CFETS basket has declined, resulting in a further slight decrease in the impact coefficient of the US dollar index on the central parity of the US dollar against the yuan, with the impact coefficient falling from 0.348 to 0.341, which means that the US dollar index actively appreciates by 1% (that is, the US dollar appreciates by 1% against all currencies in the US dollar index basket at the same time), and the depreciation pressure of the RMB against the central parity of the US dollar has decreased from 0.348% to 0.341% (Figure 6), which is the third consecutive year of decline.
2. Under the new weight, the stress test results of RMB depreciation brought about by the fluctuation of the US dollar index:
Under the old and new weights, the US dollar index fluctuates to stress test the central parity of the RMB, as shown in Chart 7. Under the new weight, the U.S. dollar index has "actively appreciated" from the current price level of 103.23 by about 3.4% to about 106.8, which has brought depreciation pressure of about 1.2% to the central parity of the U.S. dollar against the yuan, corresponding to the depreciation of the central parity of the renminbi from the current about 7.12 to around 7.2.
3. Review of important overseas data and high-frequency data tracking
(1) Review of important data this week 1. The market expects interest rate hikes/cuts by the central banks of the United States, Europe and Japan
See Figure 8. Compared with last Friday, the market's expectations for interest rate hikes/cuts by the central banks of the United States, Europe and Japan have changed little this week: (1) The Fed's expectations have not changed much, and the Fed has priced in the Fed to cut interest rates starting in May and cutting interest rates 5.4 times throughout the year. (2) The change in expectations for the European Central Bank's interest rate cut is marginally dovish. The first rate cut is expected in June, with a one-time cut of 50bps. There were 5.7 rate cuts for the year, and last week 5.3 rate cuts were expected for the year. (3) Expectations for the Bank of Japan's interest rate hike have increased. The first rate hike is expected in June, with 2.3 rate hikes throughout the year.
2. Review of major economic data
1) A number of U.S. economic data exceeded expectations, showing economic resilience. For example, on the consumption side, retail sales in December were 0.6% month-on-month (Bloomberg consensus estimate of 0.4%), the University of Michigan consumer sentiment index was 78.8 in January (Bloomberg consensus estimate of 70), on the production side, industrial production in December was 0.1% month-on-month (Bloomberg consensus estimate of 0%), and in real estate, the annualized total of housing starts in December was 1.46 million units (Bloomberg consensus estimate of 1.43 million).
2) Eurozone industrial production fell short of expectations, with November industrial production -6.8% y/y, Bloomberg consensus forecast of -5.9%, and the previous value of -6.6%.
3) Japan's inflation was in line with expectations, with core CPI of 2.3% year-on-year in December, in line with Bloomberg consensus expectations and 2.5% previously.
(2) Important economic data and events in the coming week
(3) Weekly economic activity index
The index of economic activity in the United States rebounded slightly. In the week of January 20, the US WEI index rose to 1.9, compared to 1.7 last week.
Economic activity in Germany continued its upward trend. In the week of January 21, the German WAI index rose to 0.09, compared to 0 last week.
(4) Demand
1. Consumption: U.S. retail sales remained relatively high year-on-year
In terms of goods consumption, U.S. retail sales remained relatively high year-on-year. U.S. Redbook commercial retail sales were 5.2% year-over-year in the week of Jan. 20 and 5% in the week of Jan. 13.
2. Travel: The number of flights in Europe has declined recently
The number of flights executed worldwide this week was basically the same as the same period in 2023. In the week ending Jan. 27, the cumulative number of flights operated worldwide was 1.222 million, compared to 1.224 million in the same period in 2023.
Recently, the number of flights operated by the United States has flattened, and the number of flights from major European countries has declined. In the week ended Jan. 27, the cumulative number of flights operated in the United States was 50,000, up slightly by 0.3% from the previous week, and the cumulative number of flights operated in Europe was 53,600, down 1.8% from the previous week.
3. Real estate: U.S. mortgage rates rebounded slightly, and the number of mortgage applications rebounded
U.S. mortgage rates rebounded slightly this week. The US 30-year mortgage rate rebounded to 6.69% on 25 January, compared to 6.6% last week and 6.66% last week.
The number of U.S. mortgage applications has picked up recently. In the week ended Jan. 19, the U.S. MBA Market Composite Index, which reflects the number of mortgage applications, recorded 218.2, up about 3.7% from a week ago.
(5) Employment: The number of initial jobless claims in the United States rebounded
Recently, the number of initial jobless claims in the United States has rebounded. U.S. initial jobless claims rose to 214,000 in the week of January 20, compared to 189,000 in the week of January 13.
The number of continuing jobless claims in the United States continued to rise slightly. In the week of January 13, the number of people continuing to apply for unemployment benefits in the United States was 1.833 million, compared to 1.806 million in the week of January 6.
(6) Prices: Commodity prices continued to rise, and retail gasoline prices in the United States rebounded
Recently, commodity prices have continued to recover. On 26 January, the RJ/CRB commodity price index recorded 273.6, up about 0.4% from the previous week.
Recently, retail gasoline prices in the United States have rebounded. U.S. gasoline retailed at $2.95/gallon on Jan. 22, up about 0.2% from a week ago.
(7) Finance
1. Financial conditions: Marginal easing of financial conditions in the euro area and tightening of financial conditions in Japan
Recently, the US financial conditions index has been flat, with an average of 99.38 in the week of January 26 and an average of 99.4 since January this year. The Eurozone Conditions Index edged lower. The Eurozone Financial Conditions Index came in at 101.51 on 26 January, compared to around 101.59 a week ago. Japan's financial conditions index rose. On 26 January, Japan's Financial Conditions Index was 96.7, up from 96.63 a week earlier, indicating a marginal tightening of financial conditions.
2. Treasury bond spreads: Recently, the interest rate differential between the United States and Japan and the European center-peripheral interest rate spread have narrowed
The 10-year U.S.-Japan interest rate differential has narrowed recently. On 25 January, the 10-year USJP spread was 339bps, compared to 348bps a week earlier. The spread between the 10-year U.S. and European Treasury bonds traded sideways. On 25 January, the spread between the 10-year US and European Treasury bonds was 177bps, essentially unchanged from a week ago.
The 10-year German-Italian interest rate differential has continued to narrow recently. The average spread between German and Italian 10-year government bonds was -155bps in the week of January 26, compared to about -159bps a week ago.
For details, please refer to the report "[Hua Chuang Macro] The Impact of the US Dollar Index Further Declines - A Brief Review of the New Weights of CFETS in 2024 & Overseas Weekly Report No. 37" released by Hua Chuang Securities Research Institute on January 29.
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20230607 30 Years of China-West Asia Cooperation: Strategic Significance, Cooperation History and Key Areas-Policy Observation Biweekly Bulletin No. 59
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