Recently, the shock wave of the cooling of the expectation of interest rate cuts in the United States is still spreading, and the local currencies of many countries such as the yen, South Korean won, Indian rupee, and Indonesian rupiah have fallen sharply against the US dollar, and the yen has continued to decline against the US dollar after falling below a new low in 34 years, and the central price of the RMB is also testing the stage low.
Against the backdrop of sudden changes in the global market, how much pressure will the non-US market bear, and how should Chinese import and export enterprises manage foreign exchange risks?
A few days ago, during the London Stock Exchange Group's 2024 Market Outlook Forum, Liu Yang, a foreign exchange expert and general manager of the financial market business department of Zheshang Zhongtuo Group, told the first financial reporter that due to the need to avoid inflation rising again, the timing of the Fed's interest rate cut has been continuously postponed, which has led to pressure on non-US currencies. For example, even as the Bank of Japan raises interest rates, the world seems to be happy to use the yen as a cheap financing currency, i.e., borrowing yen to buy dollar assets, which has led to the yen approaching the 160 mark against the dollar. In his view, for Chinese import and export enterprises, importers should maintain a risk-neutral hedging mentality and purchase foreign exchange in advance according to demand under the current favorable swap point;
A strong US dollar has exacerbated volatility in Asian currencies
The latest US data did little to breathe the already volatile markets of late, and the Fed's favorite inflation gauge once again exceeded expectations.
On the evening of April 26, the latest data from the U.S. Department of Commerce showed that the core PCE price index in March, excluding food and energy, grew by 2.82% year-on-year, higher than the expected 2.7%, and the previous value was revised up to 2.8%. The month-on-month growth rate was 0.3%, in line with expectations and unchanged from the previous value. On a three-month annualized basis, the core PCE price index jumped to 4.4%.
"In terms of industries, driven by the service industry, the overall PCE price index accelerated month-on-month and year-on-year. For core PCE prices, service prices are also the biggest driver. Inflation in services, excluding housing, rose again, and the previous value was revised upwards at the same time. Among them, transportation services and other services are the biggest drivers. Matt Weller, global head of research at FOREX, told reporters.
In the past two weeks, a series of data has caused the dollar index to rise to 106, the 10-year Treasury yield has risen from around 4% to more than 4.6% today, and the expectation of a rate cut in June has been dashed, and the market has predicted the first rate cut in September or even December. For example, a week earlier, US retail sales, known as "horror data", rose 0.7% month-on-month in March, higher than expectations of 0.3%, which led to a sharp correction in US stocks, and US CPI inflation data for March exceeded expectations, rising 3.5% year-on-year (consensus 3.4%), the highest since September last year.
The yen, which has performed the worst so far this year, is a product of a strong dollar. The Bank of Japan (BOJ) decided on 26 April to keep its current monetary policy unchanged and not to implement quantitative tightening as expected. After the news was announced, the yen, which had been continuously declining, "dived" again, and the yen fell below 158 yen to 1 dollar against the dollar, once again refreshing the lowest level since May 1990.
"It is precisely because of the high US inflation data that even if USD/JPY falls, it may find support in the process until the fundamentals change. At the end of the week, USD/JPY broke through the 157 mark and approached 158. Weller told reporters that U.S. inflation data over the past few months (and arguably the past few quarters) have stalled above the Fed's 2% target. Even fears of a possible intervention by the Bank of Japan did not help, for example, at 08:00 London time on 26 April, USD/JPY fell 150 pips from a high near 157 (which raised questions about possible central bank intervention), but then rebounded back strongly.
Liu Yang told reporters that the Japanese government has repeatedly expressed concern about the continued depreciation of the yen, which will continue to import inflation into Japan and worsen its terms of trade (making exports cheaper for foreign buyers but more expensive for imports). However, the depreciation of the yen is also good for Japan's exports (e.g., semiconductors, automobiles, etc.). Due to the lack of a strong willingness on the part of the Bank of Japan to intervene, traders continue to favor high-yielding foreign currencies over the Japanese yen.
The yen isn't the only currency that has been "mired in the mud" lately. At the end of last year, the won was less than 1,300 won to the dollar, and it has now fallen to nearly 1,380 won to the dollar. On April 16, it once fell below the 1,400 won mark in intraday trading. The U.S., Japan and South Korea finance ministers' meeting said the three countries "recognize the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and South Korean won" and will hold close consultations on foreign exchange market fluctuations.
At the same time, the currencies of several other Asian countries have shown similar movements. Asian currencies such as the Indian rupee, Indonesian rupiah, Malaysian ringgit, Vietnamese dong and Philippine peso have continued to depreciate. Bank Indonesia recently raised three major interest rates by 25bp to "strengthen the stability of the rupiah exchange rate", but the effectiveness of this measure is still questioned, as despite repeated interventions in the market, Bank Indonesia has failed to prevent the rupiah exchange rate from depreciating by more than 5% from the level at the beginning of the year.
The renminbi is under pressure in the short term
People from all walks of life believe that under the strong dollar, the renminbi may be under pressure in the short term, but compared with some Asian currencies, the recent fluctuations of the renminbi are not large, and the yen has also depreciated against the renminbi by nearly 4% in the past three months. Similarly, compared with the Bank of Japan's "verbal intervention", the efforts of the People's Bank of China to stabilize the exchange rate are obvious, and the USD/RMB has been fluctuating in the range of 7.15~7.25 this year.
At the close of the past week, USD/CNY was at 7.2464 and USD/CNH was at 7.2687.
A number of foreign bank strategists told reporters that for now, they still believe that the USD/RMB will fluctuate in a range below 7.3, and the willingness of the People's Bank of China to maintain stability is still prominent. In the recent stage, the countercyclical factor range of the central price of RMB is about 1000~1700 points.
"In addition to the central parity, the central bank may need to find more ways to maintain the temporary stability of the RMB exchange rate, especially in the context of frequent global political events this year. Liu Jie, head of China macro strategy at Standard Chartered Bank's global research department, said in a recent interview with Yicai that doing more foreign exchange swaps in the domestic market and moderately tightening the liquidity of the offshore RMB market may also be options in the toolbox.
Wang Ju, head of foreign exchange and interest rate strategy at BNP Paribas Greater China, also told the first financial reporter a few days ago that since March 22, the central bank of China has set the median price below 7.1 every day to release a stable signal. "We believe that the central bank's attitude towards monetary stability in the short term is obvious. However, due to the large deviation between the central price and the real exchange rate, the spot transaction price has approached the upper limit range of 2% fluctuation set by the central bank, that is, around 7.24. Therefore, the PBOC needs to use a variety of methods to maintain the stability of the RMB exchange rate, such as reducing foreign exchange swaps in the domestic market and moderately tightening the liquidity of the offshore RMB market. In her view, in the short term, the central bank will maintain the central parity around 7.1 to keep the RMB exchange rate stable in the range of 7.1~7.3.
But overall, the release of future exchange rate pressures depends more on when the dollar starts to weaken. So, is the dollar expected to weaken in the future?
"We have seen an easing of the Middle East conflict between Iran and Israel, while improving Eurozone data has started to drive the euro back. In addition, much of the repricing of US interest rates has already been priced in, and if any subsequent US economic data falls short of expectations, the US dollar could be expected to weaken. Weller told reporters.
In his opinion, in the coming week, it is necessary to pay attention to a series of blockbuster events and economic data in the United States. On 2 May, the Fed will announce its interest rate decision, and with a rate cut in May out of sight, the focus will be on how the Fed assesses the movement of prices and employment. Previously, Fed Chair Jerome Powell and others shrugged off the higher inflation data for the first few months of the year, but recently the rhetoric has changed and the dollar has risen accordingly. Markets are now pricing in a more hawkish meeting. But any indication of a leaning interest rate cut before the end of the summer will now provide a dovish surprise, with non-farm payrolls due on 3 May, which could ease concerns about the Fed's ability to cut rates if there are any signs of weakness in US employment or wage data, triggering a sell-off in the US dollar and a fresh rally in gold, and the US ISM services PMI will also be released on the same day, with the S&P Global PMI released last week showing a sharp slowdown in the pace of US business activity growth in April, indicating weak demand.
Foreign trade enterprises should respond to volatility with a risk-neutral concept
At present, the pressure on the RMB exchange rate still exists, and it is not ruled out that the subsequent market volatility will increase, which will test the ability of import and export enterprises to cope, so as the central bank has repeatedly emphasized, it is important to guide enterprises and financial institutions to adhere to the concept of "risk neutrality".
Liu Yang told reporters that under the concept of risk neutrality, import and export companies can adopt different strategies. For export enterprises, due to the current high US dollar interest rate, enterprises can still keep US dollar demand deposits and wait until the time window when the price is more appropriate for foreign exchange settlement.
"At present, the cost of forward foreign exchange settlement is high, because the swap point has fallen very deep and is in the negative range (about -2900 points for a one-year period), which means that the current enterprise of forward foreign exchange settlement can only exchange about 7 yuan for 1 US dollar. If the enterprise itself has strong professional ability, it is recommended that the export enterprise can buy some relatively long term USD/RMB put options, so that while retaining the US dollar deposit, some protection can be carried out in the other direction. ”
For importers, he believes that it is still necessary to maintain the principle of "risk neutrality" and manage foreign exchange exposure in advance. "For example, at the same time as signing the contract, you should start to manage the maturity risk, because the domestic 1-year swap point is currently more than -2900 points, even if the cost of the forward foreign exchange risk reserve is deducted, if you do a relatively long-term forward foreign exchange purchase, the current price is about 7.25, but after deducting the negative swap point of nearly 3000 points, the 1-year forward foreign exchange purchase can do about 7, this price is actually very good. Therefore, for enterprises that need to purchase foreign exchange, they can make arrangements in advance to lock in exchange rate risk. ”
(This article is from Yicai)
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