Settlement and sale of foreign exchange
Global Macro: The speeches of the US and European commissioners strengthened the divergence of monetary policies between the two sides, and the US dollar exchange rate fluctuated after the interest rate rose. Technology stocks led the decline in U.S. stocks, and the situation in the Middle East caused periodic concerns. Major non-US currencies continued to be under pressure, while the RMB showed resilience. The spread between onshore and offshore RMB forward swaps widened.
G7 exchange rate: The dollar index is expected to continue to fluctuate strongly, and there is strong technical resistance above 107. There is little suspense about the ECB's interest rate cut in June, but it is necessary to pay attention to the hawkish Fed's constraints on the room for future ECB interest rate cuts. The U.S., Japan, and South Korea's Treasury ministries agreed to maintain close communication on foreign exchange market volatility and be vigilant against the risk of joint intervention, which could help alleviate the pressure on Asian currencies.
RMB exchange rate: In the short term, the closing price of the US dollar against the RMB is expected to continue to remain strong and volatile, while the central price will rise at a gentle slope and converge to the closing price, and adjustment tools such as offshore CNH Hibor will continue to guide the RMB exchange rate expectations. Pay attention to geopolitical changes, equity market risks, and the possibility of joint intervention by Japan, South Korea and the United States. (See text for hedging strategy)
Domestic policy: The China Securities Regulatory Commission (CSRC) has issued five capital market cooperation measures in Hong Kong, including the relaxation of the scope of eligible products for equity ETFs under Stock Connect, the inclusion of REITs in Stock Connect, the inclusion of RMB stock trading counters in Hong Kong Stock Connect, the enhancement of mutual recognition of funds (MRF) arrangements, and the support for the listing of leading enterprises in mainland industries in Hong Kong.
1. Global macro overview
1.1 Review of the Forex market
In terms of the G7 exchange rate, Fed officials continued to be hawkish, with expectations of interest rate cuts narrowing to 25-50bp during the year, and the dollar index and 10-year Treasury rates rising to around 106 and 4.6%. Technology stocks led the decline in U.S. stocks, and tensions in the Middle East caused concerns for a while, and geopolitical conflicts did not escalate further in the short term. ECB President Christine Lagarde said that interest rate cuts will be taken soon if there is no additional shock, but the Fed's hawkish monetary policy will make it more difficult for the ECB to maintain policy coordination. UK core retail sales data for March fell short of expectations, and the pound depreciated more against the dollar than the euro.
In terms of exchange rates in Asia, emerging market currencies were generally under pressure, with the rupiah depreciating sharply. The central banks of South Korea, Thailand, Indonesia and other countries have said that they will intervene. Indonesia requires state-owned enterprises (SOEs) with import needs or foreign currency-denominated debt to refrain from buying large amounts of US dollars when the rupiah is under pressure, and requires natural resource exporters to also comply with the repatriation of US dollar earnings to support foreign exchange reserves and the rupiah.
In terms of the RMB exchange rate, the central parity stood above 7.10 again, but the overnight CNH Hibor rate also recorded the highest value of the year, the onshore USDCNY continued to fluctuate below 7.245, and the offshore USDCNH closed down this week. The renminbi appreciated against the euro, the yen and the pound, and depreciated against the Hong Kong dollar. Onshore forwards and swaps went down, offshore forwards and swaps rose, and onshore and offshore forward and swap spreads both widened.
1.2 Important Interest Rate Tracking
In terms of US dollar liquidity, the implied US dollar interest rate of 3M onshore swaps fell slightly, the US dollar SOFR and Libor interest rates fluctuated, and the onshore and offshore US dollar interest rate differential (offshore-onshore) widened.
In terms of the RMB market, the central bank carried out a reverse repurchase operation of 10 billion yuan and an MLF of 100 billion yuan this week, with a total of 12 billion yuan of reverse repurchase and 170 billion yuan of MLF expiring, and a net withdrawal of 72 billion yuan in the open market. In terms of market interest rates, the onshore 3-month Shibor and NCD interest rates continued to fall, the CNH Hibor rose, and the onshore and offshore RMB interest rate differentials (offshore-onshore) widened.
2. G7 trend analysis
2.1 The Financial Stability Report warns of U.S. inflation and hedge fund high leverage risks
On April 19, local time, the Federal Reserve released its semi-annual financial stability report, saying that persistent inflation is regarded as the number one risk to financial stability. In addition, hedge fund leverage is at least the highest since 2013, geopolitical issues, the 2024 US presidential election, etc. were also mentioned.
The Fed's Financial Stability Report includes the results of a survey of financial market contacts, as well as a risk assessment of four main areas: asset valuation, corporate and household borrowing, financial sector leverage, and financing risk. While borrowing costs remain at their highest level in 25 years, the Financial Stability Report notes that there is no evidence of widespread risk to the U.S. financial system.
Persistent inflation leading to higher-than-expected interest rates is seen as the biggest threat to financial stability in the Financial Stability Report. The second risk cited was geopolitical issues, including the escalation of tensions in the Middle East and the ongoing Russia-Ukraine conflict. In addition, while the U.S. banking sector has generally remained robust and resilient since the last report, with most banks continuing to report capital levels well above regulatory requirements, available data shows that hedge fund leverage has grown to historic highs, largely due to the largest hedge fund borrowings.
Fed officials continued to be hawkish this week. On 16 April, Fed Chair Jerome Powell said that "recent data suggest that there is a lack of further progress on inflation, and that it may take longer to have confidence in inflation, and that it may be appropriate to allow higher interest rate policy to work for longer." On April 18, Atlanta Fed President Bostic (2024 FOMC member) said: "The U.S. economy is slowing, but at a slow pace, wages are growing faster than inflation, inflation is on track to fall back to the 2% target, the Fed is not in a hurry to achieve the inflation target of 2%, can be patient, and still expects the Fed to cut interest rates once this year." New York Fed President Williams (FOMC perpetual voting) reversed his dovish stance, saying that "if the data shows that the Fed needs to raise rates to achieve its goals, then the Fed will raise rates", but he also stressed that this is not the "baseline scenario" he expects.
In addition, the New York Fed, which manages the Fed's open market operations account, expects in its annual report that balance sheet reduction (QT) will end in 2025 and that reserves are expected to bottom out at $2.5 trillion-$3.0 trillion in 2026.
2.2 The ECB needs to consider monetary policy coordination with the Fed
On 16 April, ECB President Christine Lagarde said that "in the absence of additional shocks, it will be time to ease restrictive monetary policy in a fairly short period of time". She also noted that the ECB will be "extremely attentive" to oil prices, saying that it will "take the exchange rate very seriously and must take the impact of exchange rate movements on inflation into monetary policy considerations." "This means that the ECB must consider the synergy with the Fed's monetary policy.
On April 18, ECB Governing Council member Holzmann said: "If high inflation in the United States forces the Fed not to cut interest rates this year, the ECB's room for maneuver will be limited, and it is expected that the ECB will not be able to cut interest rates 3-4 times; ”
On April 19, ECB Governing Council member Simkus said: "If inflation in the eurozone slows more than expected, then the ECB can cut interest rates in June and July, everything depends on the data, if inflation slows faster than forecast, and if it has to cut its growth forecast for this year again, then it could set the stage for a rate cut in July, three or even four rate cuts in 2024 are possible, and the macroeconomic forecast for June, September and December could be three rate cuts, A gradual and sustained accommodative monetary policy stance sets the groundwork, and whether there will be four rate cuts will depend on the data. ”
On 20 April, ECB Governing Council member Hunsch said: "The July meeting will provide hints on the path of interest rates, higher oil prices will affect the timing of central bank rate cuts, after two rate cuts, the ECB's interest rate decisions will become more difficult, and if the Fed cuts rates more slowly than the dot plot or market expects, it may feed back into European inflation." ”
2.3 The situation in the Middle East remains tense
On April 1, local time, Israel launched an airstrike on the consulate building of the Iranian Embassy in Syria and caused the consulate building to collapse, causing many casualties. On April 14, local time, Iran launched dozens of suicide drones into Israel, Iraq announced that it had closed its airspace and stopped all air traffic, the White House reaffirmed its firm support for Israel's security and helped it defend itself against threats from Iran, and then the United States and Britain intercepted Iranian drones over Iraq and Syria. On the evening of April 14, Iran launched ballistic missiles at targets in Israel.
On 19 April, Israel launched air strikes against targets in Iran. ABC reported that a U.S. official confirmed to the outlet that an Israeli missile had hit a target inside Iran. U.S. President Joe Biden said he was considering sending more than $1 billion in new weapons to Israel.
After an Israeli missile hit an Iranian target on April 20, Iran expressed restraint, saying that its nuclear facilities were not damaged, and the US secretary of state said that the United States was not involved in the Israeli attack. On April 21, according to the Israel Defense Forces, air raid sirens sounded in Liman and other areas in northern Israel, and there is no information on casualties at present. On April 21, according to the Syrian media "Sham FM", an oil pipeline caught fire in the province of Homs in central Syria, and the specific cause of the fire is not yet known.
On 19 April, Standard & Poor's downgraded Israel's long-term issuer rating to A+ (previously AA-) with a negative outlook, given that the Israeli-Iran conflict indicates that Israel faces many risks and that the Israeli-Hamas dispute is likely to continue into 2024.
2.4 Outlook
The divergence of monetary policy between the United States and Europe has strengthened again this week, and the dollar index is expected to continue to fluctuate strongly, with strong technical resistance above 107. There is little suspense about the ECB's interest rate cut in June, but it is necessary to pay attention to the Fed's hawkish constraints on the room for future ECB interest rate cuts, otherwise the weak euro exchange rate may hinder the process of falling inflation in the eurozone. On April 18, the South Korean Ministry of Finance issued a tripartite joint statement saying that the Ministries of the United States, Japan and South Korea agreed to maintain close communication on the issue of foreign exchange market fluctuations. We need to be wary of the risk of future joint intervention, which will ease the pressure on Asian currencies.
3. RMB exchange rate research and strategic suggestions
3.1 In March, the wide-caliber foreign exchange settlement and sales recorded the largest deficit since December 2016
In March 2024, banks recorded a deficit of US$20.4 billion in foreign exchange settlement and sales on behalf of customers, compared with a deficit of US$6.1 billion in the previous period, a deficit of US$14.3 billion from the previous quarter, a surplus of US$4.5 billion in forward foreign exchange settlement on behalf of customers, and a surplus of US$4.1 billion in the previous value, an increase of nearly US$500 million from the previous quarter, and a deficit of US$14.5 billion in foreign-related receipts and payments on behalf of customers, with a surplus of US$12.1 billion in the previous value, an increase of nearly US$26.5 billion from the previous month.
From the point of view of sub-items, although the surplus of goods and trade remained stable, the deficit of foreign exchange settlement and sales of trade in services, direct investment, and securities investment all expanded, resulting in a month-on-month widening deficit in the settlement and sale of foreign exchange by banks on behalf of customers in March. In March, the foreign-related receipts and payments of banks on behalf of customers turned from positive to negative, mainly due to the large net outflow of securities investment, and the widening of the primary and secondary income deficits.
The exchange rate ended March at 60.0%, down 1.1% from February, and the purchase rate was 66.4%, up 1.5% from February. The difference between the purchase rate and the closing exchange rate widened further to 6.4%.
3.2 In the first quarter, the mainland's attraction of foreign investment decreased year-on-year
From January to March 2024, 12,086 foreign-invested enterprises were newly established across the country, up 20.7% year-on-year, and the actual amount of foreign capital used was RMB301.67 billion, down 26.1% year-on-year and up 41.7% quarter-on-quarter compared with the fourth quarter of 2023.
From the perspective of industries, from January to March, the actual use of foreign investment in accommodation and catering, construction, wholesale and retail trade, and financial industry increased by 84.7 percent, 17.5 percent, 2.2 percent, and 1.4 percent respectively. The actual use of foreign investment in the manufacturing industry was 81.06 billion yuan, accounting for 26.9% of the country's actual use of foreign investment, an increase of 2.3 percentage points over the same period last year. The actual use of foreign investment in the high-tech manufacturing industry was 37.76 billion yuan, accounting for 12.5% of the country's actual use of foreign investment, an increase of 2.2 percentage points over the same period last year. Among them, the actual use of foreign investment in the medical equipment and instrumentation manufacturing industry increased by 169.7% year-on-year.
3.3 Outlook
In terms of market research and judgment, the closing price of USD/RMB is expected to continue to maintain strong volatility in the short term, while the median price will rise at a gentle slope and converge to the closing price, and adjustment tools such as offshore CNH Hibor will continue to guide the RMB exchange rate expectations. It is necessary to be vigilant against geopolitical risks, equity market corrections and other risks, and if Japan, South Korea and the United States jointly intervene, the RMB will also be supported to a certain extent.
In terms of hedging strategy, it is recommended that the exposure to foreign exchange purchase within 6 months can be partially locked, and the short-term US dollar foreign exchange settlement exposure can consider the risk of call lock-in.
Fourth, domestic policy
4.1 The SFC has issued five measures for capital market co-operation with Hong Kong
In line with the implementation of the Several Opinions on Strengthening Supervision and Risk Prevention and Promoting the High-quality Development of the Capital Market issued by the State Council, the China Securities Regulatory Commission (CSRC) has recently proposed five measures to further expand and optimize the Stock Connect mechanism, help Hong Kong consolidate and enhance its status as an international financial centre, and jointly promote the coordinated development of the capital markets of the two places.
The first is to relax the scope of eligible products of equity ETFs under Stock Connect. It is proposed to appropriately relax the average AUM requirements for eligible stock ETFs, reduce the Hong Kong equity weighting requirements and Hong Kong Stock Connect stock weighting requirements for Southbound Hong Kong Stock Connect ETF products, and make reciprocal adjustments for Northbound Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect ETF products, so as to support the development of Hong Kong as an international asset management center.
The second is to include REITs in the Stock Connect. It is proposed to make overall reference to the mutual access system arrangements between the two places, and include eligible REITs in the Mainland and Hong Kong into the Stock Connect, so as to further enrich the trading varieties of Stock Connect.
The third is to support the inclusion of RMB stock trading counters in the Hong Kong Stock Connect. Since the launch of the HKD-RMB Dual Counter Mechanism in Hong Kong, the Mainland, HKEX and HKSCC have been actively studying the inclusion of the RMB counter in Hong Kong Stock Connect, and a preliminary consensus has been reached on the relevant business plan. In the next step, the two sides will continue to promote the improvement of business plans, rule revisions, technological transformation, investor education and other preparatory work, and strive for an early launch to facilitate the internationalization of the RMB.
Fourth, optimize the mutual recognition of funds arrangement. It is proposed to promote the appropriate relaxation of the restrictions on the proportion of mutual recognition of funds sold to foreign countries, and allow the investment management functions of Hong Kong recognised funds to be delegated to overseas asset management institutions with the same group as the managers, so as to further optimize the mutual recognition of funds arrangement and better meet the diversified investment needs of investors in the two places.
Fifth, we will support leading enterprises in mainland industries to list in Hong Kong. In the year since the promulgation and implementation of the rules of the overseas listing filing management system, 72 enterprises have completed the filing of initial public offerings (IPOs) in Hong Kong, and the financing channels for listing in Hong Kong have been unimpeded, which strongly supports the standardized development of mainland enterprises by making use of the two markets and two resources. The China Securities Regulatory Commission (CSRC) will further strengthen communication and coordination with relevant departments to support eligible leading enterprises in the Mainland industry to list and raise funds in Hong Kong.
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