The Jedi is coming

On March 22, the RMB opened with a straight dive, with the onshore RMB falling 289 basis points against the US dollar and the offshore RMB falling 447 basis points against the US dollar on the same day. During the same period, the outflow of northbound funds was 3.138 billion yuan, and the general correction of major types of assets made the RMB exchange rate the focus of the market again.

Since February 5, the RMB exchange rate against the US dollar has been in a narrow range of consolidation, the recent exchange rate has suddenly fluctuated sharply, changing the previous stable trend, what are the deep-seated reasons, and how to view the subsequent exchange rate trend?1

1

The economic fundamentals and monetary policies of China and the United States are not the reasons for the sharp depreciation of the renminbi.

Analyzing the RMB exchange rate from the economic fundamentals and monetary policies of China and the United States is undoubtedly the most popular exchange rate analysis framework, but in many cases, this framework is difficult to explain the sudden and large fluctuations in the exchange rate. After all, both economic fundamentals and monetary policy are slow variables, high-frequency economic data is only released month by month, monetary policy will last for several months or even longer, but the foreign exchange market will give a transaction price every trading day. In fact, the "fundamental-monetary policy" analytical framework is more suitable for analyzing the equilibrium level of the exchange rates of the two countries in the medium and long term, rather than explaining the fluctuations of the exchange rate in the short term.

What's more, focusing solely on China and the United States cannot explain the sudden depreciation of the renminbi. On March 22, the onshore RMB depreciated by 0.4% against the US dollar, but appreciated by 0.03% against the euro, 0.51% against the yen, and 0.50% against the British pound. If it is simply attributed to the Fed's FOMC meeting on the morning of the 21st, the market will inevitably react too slowly, which denies the effectiveness of the market.

In fact, it is not so much that the renminbi is depreciating relative to the dollar, but rather that the dollar is appreciating relative to the renminbi. Amid the general decline in non-US currencies, the renminbi is already the strongest among the major currencies.

2

This sudden devaluation is mainly the result of internal and external factors.

Since February 5, the RMB exchange rate against the US dollar has entered a period of "quiet period", maintaining a slight shock trend, which is not only the "two sessions", the central bank's intervention factors, but also indicates that the market lacks direction and guidance, and urgently needs new information and strength to break the current balance between long and short.

The attitude of overseas central banks has upset this fragile balance. At the March FOMC meeting, the Fed remained hawkish, with the vast majority of members predicting three rate cuts in 2024, which was significantly less than the market's optimistic judgment of six rate cuts at the beginning of the year. On the contrary, the Bank of Japan raised interest rates by 10 basis points, but the yen continued to fall in the "sell facts" promotion, and even broke through the 150 mark, and the Swiss National Bank unexpectedly cut interest rates by 25 basis points, becoming the first G10 country to announce interest rate cuts in 2024, causing the market to worry that the economically weak Europe will first move into the interest rate cut range. The trend of "the United States is strong and Europe is weak" has become more and more obvious, the dollar index has risen continuously, and the pressure on the yuan has been further increased by the strong dollar.

The reduction in the median price has triggered the market's prediction of the central bank's easing of control. On March 22, the central parity of the renminbi against the US dollar was lowered by 62 basis points to 7.1004, the largest decline in more than a month, and the 7.1 mark was touched again. Although in order to maintain stability in a basket of currencies, the central parity of the RMB against the US dollar has the need to naturally decline, 7.1 is an important psychological gateway for market transactions, and such a huge decline will still trigger market speculation that the central bank will reduce the impact of countercyclical factors and temporarily relax interest rate control. Considering that after the end of the two sessions and the long-term narrow range of the RMB exchange rate, the central bank does have the need to release the pressure of RMB depreciation and open up policy space for the subsequent implementation of greater easing, this speculation is not unfounded.

In the end, the overseas central bank induced the appreciation of the US dollar, and the central price was lowered to form a consensus expectation, and the market finally found a new direction, and the flat trend of the RMB for 2 months was broken, and it depreciated sharply under the "domestic and foreign difficulties".

3

The renminbi has certain adjustment pressure, and there is still support in the medium and long term.

After the sharp depreciation on March 22, the pressure of RMB depreciation has been released in a concentrated manner, and in two trading days, the onshore yuan closed up 97 basis points, once recovering the 7.20 mark, and the offshore yuan closed up 276 basis points, once recovering the 7.25 mark. At the current stage, the RMB exchange rate may have reached a new short-term equilibrium and gradually returned to a narrow range.

In the short term, the renminbi may depreciate passively under the pressure of a strong dollar. Compared with China and the United States, the signs of recession in Europe are extremely significant, taking Germany as an example, the manufacturing PMI in March was only 41.60%, down 0.9% month-on-month, and has been in the contraction range for 21 consecutive months, the European Central Bank, the Bank of England and other major central banks are facing increasing pressure to cut interest rates, do not rule out the Federal Reserve June FOMC meeting decision before the "rush to cut interest rates", when non-US currencies depreciate sharply, the dollar index rises, and the RMB will be passively depreciated under the pressure of the strong dollar.

From a medium- to long-term perspective, fundamentals/monetary policies point to strong support for the RMB. In terms of fundamentals, the two sessions set the economic growth target for 2024 at 5%, showing a bottoming out trend from the perspective of two-year compound growth rate, while the Federal Reserve only predicts that the US economic growth rate in 2024 will be 2.1%, which is more likely to swing between a "soft landing" and a "light recession" In the future, the central bank will most likely take into account the internal and external balance, and the Federal Reserve will basically cut interest rates three times this year, and historically, the Federal Reserve prefers to "slow rise and fall sharply", and does not rule out more aggressive interest rate cuts within the year. The fundamentals are "rising in the east and stabilizing in the west", and interest rate differentials are expected to narrow, so there is no need to worry about the trend of the RMB in the medium and long term.

Generally speaking, the short-term fluctuations of the RMB exchange rate are not to be feared, and the main disturbances come from overseas central banks, whether from the perspective of fundamentals or monetary policy, the RMB does not have the basis for long-term sharp depreciation, and the booming Chinese economy will form a strong support for the RMB.

[Note: The market is risky, and investment needs to be cautious.] In any case, the information or opinions expressed in this subscription account are only an exchange of views and do not constitute investment advice to any person. Unless otherwise noted, the research data in this article is supported by Straight Flush iFinD]

This article was originally written by "Xingtu Financial Research Institute", the author is Wu Zewei, a researcher at Xingtu Financial Research Institute, and the cover picture is from Yitu.com.