The strong dollar and the "Trump trade" are back again, what is the direction of the yuan after falling below 7.1?

In just a few weeks, the logic of the transaction has changed dramatically - the market's expectations for the Fed to cut interest rates this year have plummeted, from at least one more 50 basis point (BP) rate cut to doubts about whether it can cut rates again; The U.S. dollar index rose again, breaking through 103; Non-dollar currencies tumbled, with the yen closing close to 150 against the dollar and the renminbi falling below 7.1 against the dollar, as exporters who had been struggling to settle foreign exchange also seem to have slowed down recently.

In fact, China's recent economic policies have attracted attention, but changes in the external environment and risks continue unabated. In addition to the Fed's interest rate cut expectations and changes in the inflation situation, the "Trump deal" is back again. As of Oct. 13, United States Vice President and presidential candidate Kamala Harris trailed her rival by 0.1 in the key swing state of Pennsylvania, according to the RCP poll average. Beginning on Oct. 7, Republican presidential candidate Donald Trump reversed Harris and has since maintained a steady lead, leading at the highest point of 0.4.

Interviewed by the first financial reporter of domestic and foreign institutional strategists, traders and some exporters have said that many exporters have speculative sentiment, after the RMB against the US dollar once rose above 7.1, long speculative sellers forced exporters, but with the recent recovery of the US dollar, the yield of the 10-year US Treasury back to 4.2%, many exporters began to stop and see. However, around 7.01 USD/CNY, it seems that there is another big bank buying the dollar, which may be intended to protect exporters, and the central bank will increase the countercyclical factor adjustment at a time when the selling pressure on the yuan intensifies. Most institutions expect that the future exchange rate is likely to fluctuate in the range of 7.0~7.3.

The rebound in United States inflation expectations has triggered the return of a strong dollar

Overnight (October 14) the lack of impact of important economic data, but the Fed Governor Waller's remarks of "slowing down the pace of interest rate cuts" helped the dollar index to continue the rebound momentum to stand at the 103 mark, and non-dollar currencies continued to adjust, of which the dollar rose against the Canadian dollar for 9 consecutive days, closing at 1.3795, a new high in two months, and the dollar approached the 150 mark against the yen, and the yen once broke through 140 in September, and the dollar also entered the 6.9 range against the offshore yuan.

In September, the Federal Reserve unexpectedly cut interest rates by 50bp, and the market also priced in another rate cut of nearly 180bp in the next year, and the dollar index once tested the 100 mark. However, the recent return of a strong dollar is also due to a number of factors. The stronger-than-expected September jobs data in United States was a turning point as inflation has been replaced by the labor market as the Fed's main decision-making factor. Non-farm payrolls rose by 254,000 in September, much more than expected (150,000), and job growth was revised upwards by 17,000 to 159,000 in August and 55,000 to 144,000 in July. The unemployment rate fell to 4.1% in September.

Standard Chartered global chief strategist Eric Robertsen told reporters that this has brought about a big change in the market's expectations for the Fed to cut interest rates. United States interest rate futures market pricing in a Fed rate cut by just over two 25bp rate cuts by the end of the year, compared to an expected cut of nearly 75bp ahead of the Oct. 4 nonfarm payrolls release. The market has shifted from "believing that a 50bp rate cut within the year is highly likely" to "skeptical about whether the Fed will implement a 25bp rate cut at each of the November and December FOMC meetings", and the US dollar 1-year/1-year swap rate has risen about 70bp since the low point on September 1.

"The October jobs data did surprise markets, but Fed Chair Powell's recent shift in rhetoric did not help manage market expectations. This means that the Fed is starting to prepare the market for a rate cut that may not necessarily occur at every meeting. He said.

Further boosting the dollar is the recent resurgence in United States inflation expectations. Data released by the United States Bureau of Labor Statistics on October 10 showed that in September, United States CPI rose 2.4% year-on-year, down from August, but higher than market expectations of 2.3%.

Taken by sub-item, housing and food inflation together contributed more than 75% of the increase, while commodity prices also rose after falling steadily over the past year. New and used car prices, as well as clothing and furniture prices, have all risen, leading to a second rise in so-called core goods inflation since June 2023. This has also led major institutions to believe that the continuous downward United States inflation has reached a bottleneck, which also determines that it is difficult for the Fed to continue to cut interest rates aggressively.

James Stanley, senior strategist of Jiasheng Group, told reporters that under the influence of many factors, last week was a strong week for the US dollar, reversing the previous bearish trend. The Fed cut interest rates by 50bp in September, and the dollar formed new lows, driven by bears – and then prices reversed hastily. The following week, the low remained unbroken, and another new low finally appeared the following week, but the bears again failed to take advantage of the victory. The last failed breakout led to another rally, with the bulls announcing a return with a strong bullish breakout the following week.

The United States election is deadlocked, and the "Trump deal" is back

Another major factor affecting the dollar is undoubtedly the United States election, which is now less than three weeks away from the November election results.

Yicai previously mentioned that major international investment banks believe that if Trump is elected, they tend to think that the dollar and inflation are more likely to strengthen in the early stage, which is also related to uncertainty such as tariff policy, and the dollar may become a safe haven again.

And as the United States election continues to advance, the election situation has taken a dramatic turn many times. Robertson mentioned that after the current United States President Joe Biden withdrew from the election in July, Harris's poll approval rating significantly surpassed Trump's, reversing the latter's previous lead. But Harris's lead has slowed recently, and the two candidates are now evenly matched in the polls. With such a stalemate, the outcome of the general election will depend on the very close vote difference between the two sides in several swing states. Recent data also shows that the gap between Trump and Harris is narrowing, and there is momentum to catch up and surpass in several key swing states.

"The recent 'Trump Trade' (Trump) trading has been back on the rise, with Bitcoin rallying strongly and the S&P 500 hitting all-time highs, and the tech giants who are more vulnerable to tariffs, with the Nasdaq 100 clearly not gaining as much momentum as the S&P 500 lately." Yuan Yuwei, a senior global macro trader, told reporters.

Adding to the uncertainty is the recent super hurricanes that swept through North Carolina and Florida in the United States, causing severe damage to homes and infrastructure. What would be the possible impact if polling facilities were also damaged? "If the damage caused by the hurricane causes voters to face operational difficulties in voting so that the results of the relevant state elections are not recognized, we may see that the results of the general election will not be confirmed for an extended period of time. For now, global markets, especially those with high volatility, do not seem to be prepared for a prolonged period of continued uncertainty beyond election day on 5 November. Robertson said.

The renminbi turned down, and exporters' foreign exchange settlement stopped

As of 19:30 Beijing time on October 15, USD/CNH fell below 7.12, hitting 7.1343 during the day, a decline of 300 points on the day. At the end of September, the offshore yuan rose to a range of 6.9.

The spread between the US and Japanese 10-year Treasury bonds rose from 2.75% to 3.1% over the past month as Fed rate cut expectations shrank. At the same time, speculative long positions in the yen have decreased slightly in the last two weeks, which has contributed to the recent sharp decline in the yen. Traders said that the renminbi, which is also a low-interest currency in Asia, has maintained a high correlation with the yen, and has also weakened recently.

Liu Yang, a foreign exchange expert and general manager of the financial market business department of Zheshang Zhongtuo Group, told reporters that the popularity of "Trump trading" has risen, the market has begun to trade "no interest rate cuts", the interest rate gap between China and the United States has widened again, and exporters' willingness to settle foreign exchange has also begun to weaken, "Moreover, domestic foreign currency deposits in January ~ September have only increased by more than 50 billion US dollars, at least domestic foreign exchange hoarding is not as much as imagined." The latest export data was also lower than expected, which led to the start of a weakening of the yuan."

According to the data, in RMB terms, the total value of China's imports and exports in September was 3.75 trillion yuan, a year-on-year increase of 0.7%; the total export value was 2.17 trillion yuan, a year-on-year increase of 1.6%; the total import value was 1.58 trillion yuan, down 0.5% year-on-year; The trade surplus was 582.62 billion yuan.

Since September, the market has been particularly concerned about the "foreign exchange settlement effect" that may continue to drive the RMB. According to the data obtained by the reporter from major institutions, at present, the mainstream institutions estimate the excess foreign exchange hoarding of exporters at about 500 billion US dollars (including offshore). At the same time, the agency estimates that the average cost of "excess" dollars hoarded by exporters is just under 7.1. Barclays, for example, estimates that Chinese exporters hold about $500 billion, of which the agency expects up to $100 billion to $200 billion could be converted to the yuan if the USD/CNH continues to weaken below 7.1.

The reporter learned from industry insiders that despite the appreciation of the renminbi and the existence of cases of export enterprises taking the initiative to settle foreign exchange since September, the volume is not much, and they may still be waiting to see the subsequent market changes. For now, the wait-and-see sentiment may be aggravated, but it is expected that the RMB will fluctuate in the range of 7.0~7.3 is still the mainstream view.

(This article is from Yicai)