External storage
Global Macro: The resilience performance of the European and American economies diverged, the US Federal Reserve officials were hawkish, and the US dollar index remained volatile. USD/JPY resumed its rally, slowing its rally in the second half of the week amid the resistance of the Bank of Japan's suspected re-intervention and hawkish minutes. Emerging market currencies have depreciated against the US dollar as a whole, and the renminbi has shown strong stability.
G7 exchange rate: There are relatively few key economic data from the United States released this week, and the foreign exchange market is consolidating and waiting for next week's blockbuster US inflation data such as CPI and PPI for April. The preliminary inflation expectations of the University of Michigan in May both exceeded expectations, and this indicator is usually regarded as an important forward-looking indicator of the US CPI, so the possibility of inflation data to be released next week will continue to exceed expectations.
RMB exchange rate: In the short term, it is expected that the pressure on the RMB will continue to ease marginally, and the USD/RMB exchange rate will turn from a "grinding top" to a volatile one, and it is necessary to be vigilant that the US inflation data on May 15 will form a support for the US dollar index. At that time, there may be obstacles to the successive intervention of the Japanese and South Korean authorities. In addition, the People's Bank of China's first-quarter Monetary Policy Implementation Report stressed the need to "resolutely correct pro-cyclical behavior". (See text for hedging strategy)
1. Global macro overview
1.1 Review of the Forex market
In terms of the G7 exchange rate, the U.S. dollar index remained volatile this week, and the lack of upward momentum was mainly related to the rise in jobless claims, weak consumer confidence at the University of Michigan, and the resilience of the European economic recovery. The Bank of Japan gave up gains in the "intervention window" of the yen, and the yen exchange rate fell the most this week. The Bank of Japan (BOJ) is suspected of intervening again in the market on Thursday, and the minutes of its April meeting released on the same day suggested that the yen's rapid depreciation could lead to a faster rate hike, and the USD-JPY slowed its rally in the second half of the week.
In Asia, emerging market currencies as a whole depreciated against the US dollar, parsing last week's gains. Bank of Korea Governor Rhee Chang-yong said that the situation in the foreign exchange market has changed, hinting at a postponement of the rate cut.
In terms of the RMB exchange rate, the USD/RMB exchange rate opened low and moved higher during the week, and the operation rebounded above the 60-day moving average. The renminbi depreciated against the euro and the yen, and depreciated and appreciated relative to the pound and the Hong Kong dollar, and the three major renminbi indices declined. Onshore and offshore swaps and forwards and their spreads fluctuate.
1.2 Important Interest Rate Tracking
In terms of US dollar liquidity, the implied US dollar interest rate of 3M domestic swaps rose and fell, the US dollar SOFR and Libor fluctuated, and the domestic and foreign dollar interest rate differentials did not change significantly.
In terms of the RMB market, the central bank carried out a total of 12 billion yuan of reverse repurchase operations this week, while a total of 450 billion yuan of reverse repurchase operations, and the open market achieved a net withdrawal of 438 billion yuan. In terms of market interest rates, from May 6 to May 10, the 3-month Shibor fell by 1.2bp, the NCD rose by 2.17bp, and the CNH Hibor fell by 33.79bp, and the onshore and offshore RMB interest rate differentials narrowed sharply.
2. G7 trend analysis
2.1 The ECB minutes reaffirmed the possibility of a rate cut in June, and the economic recovery showed resilience
On May 10, the European Central Bank released the minutes of its April interest rate meeting. The minutes showed that at last month's meeting, the vast majority of members agreed to keep interest rates unchanged, with "several members" believing that the conditions for a rate cut had been met in April, and generally agreeing to wait for data to determine the price outlook before the June meeting. If the additional data received before the June meeting confirms the medium-term inflation outlook included in the March forecast, then it will be possible for the Committee to begin easing monetary policy at the June meeting. This is not different from the signal sent out at the April interest rate meeting. In addition, the minutes noted that the weakness of the euro against the dollar could slow the downward trend in inflation in the eurozone.
On the same day, ECB Executive Board member Elderson of the Netherlands said that "if the new quarterly forecasts can cement the level of confidence we see today, I think we are likely to take action (to cut interest rates)". ECB Chief economist Lien previously said in an interview with the media that the case for a rate cut in June is growing stronger as services inflation finally begins to ease. At the same time, the majority of members believed that June would not be a single one-off rate cut, although the timing of further rate cuts should not be set in advance to allow flexibility in the event of a sudden change in economic conditions. Currently, the market is pricing in three rate cuts by the ECB this year, or two after June, most likely in September and December, when the ECB also publishes new economic forecasts.
Eurozone economic data released this week is stable and positive. The final value of the Eurozone composite PMI in April was 51.7, exceeding the expected value and the previous value of 51.4, and the final value of the services PMI was 53.3, also exceeding the expected value and the previous value of 52.9. Eurozone retail sales rose 0.7% year-on-year in March, sharply higher than market expectations of -0.2%, compared to -0.7% in February. Germany's industrial output contracted by 3.3% year-on-year in March, also better than expectations of -3.6% and the previous reading of -4.9%.
2.2 The Bank of England hinted that the rate cut may be larger than market expectations
On May 9, the Bank of England announced its latest interest rate decision, keeping the benchmark interest rate unchanged at a 16-year high of 5.25% for the sixth consecutive time, in line with market expectations. Seven members voted to keep interest rates unchanged, and no member voted for a rate hike. However, the camp in favor of a rate cut has been expanded to two. Deputy Governor Dave Ramsden joined MPC Commissioner Swati Dhangla for an immediate reduction in the benchmark interest rate from the current level of 5.25%. After the results of the meeting were announced, the market raised its bets on the Bank of England to cut interest rates, and the probability of the first rate cut in June is expected to increase by about 10% to 60%, and the interest rate of the pound exchange rate fell in the short term.
Based on market interest rates and model forecasts, the BoE expects CPI inflation to briefly return to its 2% target in the second quarter of this year, with inflation expected to be 2.6% in one year (2.8% in February), 1.9% in two years (2.3% in February) and 1.6% in three years (1.9% in February). On the economic front, the Bank of England believes that although last year's shallow recession is over, the economy will remain weak this year and next. It expects GDP to grow by 0.4% QoQ in the first quarter of 2024 (0.1% in February forecast) and 0.2% QoQ in the second quarter of 2024. GDP growth is expected to be 0.5% in 2024 (0.25% in February), 1% in 2025 (0.75% in February) and 1.25% in 2026 (1% in February).
Bank of England Governor Andrew Bailey said he was optimistic about a rate cut, that things were moving in the right direction and that the risks posed by persistent inflation were receding. Inflation will be close to the 2% target in the coming months, and more evidence will need to be seen that inflation will remain low until interest rates are cut. The possibility of a rate cut in June has not been ruled out and is not planned, and the rate drop could be bigger than the market expects. In addition, the Bank of England also warned that the widening demand gap between the United States and Europe could lead to monetary policy divergence, which would have an impact on foreign exchange.
UK growth is also showing signs of picking up more than expected. UK GDP grew by 0.5% year-on-year and 0.2% month-on-month in March, both higher than expected; The preliminary GDP in the first quarter increased by 0.2% year-on-year, higher than the market expectation of 0%, and the previous value fell by 0.2%; Month-on-month, it increased by 0.6%, higher than the market expectation of 0.4%, and the previous value of -0.3%.
2.3 The Reserve Bank of Australia (RBA) is considering continuing to raise interest rates
On 7 May, the Reserve Bank of Australia (RBA) held an interest rate meeting and announced that it would keep the cash rate unchanged at 4.35%. The statement of the interest rate meeting showed that the current inflation rate in Australia is still very high and falling at a slower pace than expected. The immediate priority is to bring inflation down to the target range of 2%~3%. The economic outlook remains uncertain, but recent data suggests that the return of inflation to the target range may not be smooth. While the RBA stuck to its previous forecast that inflation could return to its target range in the second half of 2025 and fall to the mid-target range by 2026, it believes it will rise in the near term due to higher gasoline prices and higher-than-expected services inflation. In addition, the RBA said in its statement that the path to ensuring inflation returns to the target range within a reasonable time remains uncertain and will not rule out any possibilities and will be "vigilant to upside risks". Federal Reserve President Michelle Bullock said that the board even discussed the possibility of raising interest rates at this meeting, and the fight against inflation is not over.
2.4 Outlook
There are relatively few key economic data from the United States released this week, and the foreign exchange market is consolidating and waiting for next week's blockbuster US inflation data such as CPI and PPI for April. The preliminary inflation expectations of the University of Michigan in May both exceeded expectations, and this indicator is usually regarded as an important forward-looking indicator of the US CPI, so the possibility of inflation data to be released next week will continue to exceed expectations. In addition to the U.S. inflation data, next week it is also necessary to focus on U.S. retail sales in April, U.S. industrial production in April month-on-month, average wages in the U.K. in March excluding dividends year-on-year, and Japan's nominal GDP in the first quarter.
3. RMB exchange rate research and strategic suggestions
3.1 The valuation effect dragged down the external reserve reading in April
In April 2024, in US dollar terms, the mainland's foreign exchange reserves were US$3,200.8 billion, a decrease of US$44.8 billion month-on-month, and an increase of US$19.8 billion in the previous value; In SDR terms, the mainland's foreign exchange reserves were 2,428.7 billion SDRs, a decrease of 22.6 billion SDRs from the previous month, and an increase of 21.4 billion SDRs in the previous value.
In April 2024, the U.S. dollar exchange rate and U.S. Treasury interest rates both contributed to negative valuations, and after excluding valuation effects, foreign reserves actually increased by $2.4 billion.
3.2 PBOC releases Report on China's Monetary Policy Implementation for the First Quarter of 2024
On May 10, 2024, the People's Bank of China (PBOC) released the Report on the Implementation of China's Monetary Policy for the First Quarter of 2024 (hereinafter referred to as the "Report"), expressing a more resolute countercyclical adjustment attitude towards the exchange rate policy. According to the report, adhere to the market supply and demand, refer to a basket of currencies for adjustment, a managed floating exchange rate system, give play to the decisive role of the market in the formation of the exchange rate, comprehensive policies, stabilize expectations, resolutely correct pro-cyclical behavior, prevent the market from forming unilateral expectations and self-reinforcing, resolutely prevent the risk of exchange rate overshoot, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
The report calls for prudent and solid promotion of the internationalization of the renminbi, further expanding the use of renminbi in cross-border trade and investment, deepening foreign currency cooperation, and developing the offshore renminbi market. We will carry out pilot projects for high-level opening-up of cross-border trade and investment, enhance the level of liberalization and facilitation of cross-border trade and investment, and steadily promote the convertibility of RMB under the capital account.
3.3 Hungarian-Chinese relations have reached a new level
President Xi Jinping paid a state visit to Hungary from May 8 to 10, 2024. During the visit, President Xi Jinping held meetings and talks with President Shuyuk and Prime Minister Viktor Orban. In an atmosphere of friendship, frankness, and mutual trust, the two sides reviewed the solid foundation of Sino-Hungarian relations and the traditional friendship between the two peoples, had an in-depth exchange of views on bilateral relations and international and regional issues of common concern, and reached broad consensus. On the occasion of the 75th anniversary of the establishment of diplomatic relations between the two countries, the two sides decided to upgrade the existing comprehensive strategic partnership into an all-weather comprehensive strategic partnership in the new era, and signed or reached 18 cooperation documents.
In recent years, Hungary has become the number one destination for Chinese investment in Central and Eastern Europe. In 2023, China will once again become Hungary's largest source of foreign investment and the largest trading partner outside the EU. The economic and trade cooperation between Hungary and China has yielded fruitful results, and bilateral trade has continued to grow. Bank of China, China Construction Bank, China Development Bank and many other Chinese financial institutions have set up branches in Hungary, and Chinese companies such as BYD and CATL have invested in the Hungarian market. Hungary's "opening to the east" strategy is highly compatible with the Belt and Road Initiative. The Belt and Road Initiative between Hungary and China has brought new opportunities for Hungary to carry out practical cooperation and improve infrastructure.
3.4 Outlook
In terms of market research and judgment, following last week's intervention in the foreign exchange market, the yen and the South Korean won both gave up some of their gains this week, and the domestic RMB exchange rate "jumped" after the May Day holiday, and then the US dollar slowly rose against the yuan. In the short term, it is expected that the pressure on the RMB will continue to ease marginally, and the USD/RMB exchange rate will turn from "grinding to the top" to shock, and it is necessary to be vigilant that next week's US inflation data will support the US dollar index. In addition, the Monetary Policy Implementation Report for the first quarter emphasized "resolutely correcting pro-cyclical behavior", indicating a clear stance on counter-cyclical control.
In terms of hedging strategy, it is recommended that the exposure to foreign exchange purchases during the year can be partially locked, and the short-term US dollar foreign exchange settlement exposure can consider the risk of call lock-in.
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