Affected by the fact that the Federal Reserve may raise interest rates more than expected, causing the US dollar to bottom out strongly, the RMB exchange rate has quietly given up its gains this year.
As of 21:00 on February 28, the exchange rate of RMB against the US dollar (CNY) in the onshore market was hovering around 6.938, lower than 6.8923 at the end of last year. Considering that the RMB exchange rate once hit its highest value this year at 6.6905 on January 16, this means that it has corrected more than 2,000 basis points in the past month and a half.
A foreign exchange trader at a Hong Kong bank told reporters that the RMB exchange rate has experienced a sharp correction, mainly due to the impact of the US Federal Reserve’s possible higher-than-expected interest rate hikes, which caused the U.S. dollar index to rebound sharply. As U.S. employment data continues to be strong, core PCE prices in January When the index rose higher than expected, Wall Street raised the peak interest rate of the Federal Reserve and stepped up short-covering efforts in the U.S. dollar. The U.S. dollar index once rose from 100.8 to around 105, causing the RMB exchange rate to fall passively.
“Although the RMB exchange rate has corrected by more than 2,000 basis points in the past month and a half, the trading sentiment in the foreign exchange market has been quite stable during this period, and there are no signs of speculative capital taking the opportunity to short-sell the RMB.” He pointed out. The reasons are: first, northbound funds continue to pour into A-shares, which brings strong support to the RMB exchange rate; second, China’s economic fundamentals continue to improve, making global investment institutions well aware that speculative short-selling of the RMB has a higher chance of failure.
According to many Wall Street hedge fund managers, currently, Wall Street investment institutions that have experienced multiple sharp two-way fluctuations in the RMB exchange rate have downplayed the impact of the RMB exchange rate “breaking 7”.
The reporter learned that some hedge funds have instead established RMB buying positions near “7” because they believe that the U.S. dollar index rebound is coming to an end, and buying RMB at the bottom near “7” may create considerable excess returns.
Guan Tao, global chief economist of BOC Securities, pointed out that “7” is just a number, not a great thing. In mid-September last year, the RMB exchange rate fell below 7 again for the first time in two years. However, supply and demand in the domestic foreign exchange market were basically balanced, and the market was also buying low and selling high. By early December last year, the RMB exchange rate had regained the integer mark of “7”, so “7” was not very important. Importantly, when the RMB exchange rate becomes flexible, it may reduce the reliance on capital exchange control measures when capital flows fluctuate violently, allowing monetary policy to have autonomy, which is of positive significance to China’s financial opening.
On February 24, the People’s Bank of China released the “China Monetary Policy Implementation Report for the Fourth Quarter of 2022” stating that it will steadily deepen the market-oriented reform of the exchange rate and improve the managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. . We must insist that the market plays a decisive role in the formation of exchange rates, focus on guidance of expectations, enhance the flexibility of the RMB exchange rate, maintain the basic stability of the RMB exchange rate at a reasonable and balanced level, and give full play to the role of the exchange rate as an automatic stabilizer in regulating the macroeconomy and the balance of payments.
RMB exchange rate performance is relatively “strong”
According to many Wall Street hedge fund managers, the biggest driver of the RMB exchange rate falling from 6.7 to 6.9 in the past month and a half was the unexpected rebound of the U.S. dollar index.
As the Federal Reserve may raise interest rates beyond expectations, the U.S. dollar index rebounded sharply from 100.8 to 105. Not only the RMB, but other non-U.S. currencies have also given up all their gains this year.
For example, the exchange rates of the Thai baht and the South African rand against the U.S. dollar fell back to the levels at the end of last year, and the Egyptian pound even fell by an additional 50%.
Zhou Junzhi, chief macro analyst at Minsheng Securities, said that the unexpected rise in U.S. PCE data in January has escalated the U.S. inflation situation again, while the risk of unanchoring inflation expectations has intensified financial market concerns about further tightening of the Federal Reserve’s monetary policy, causing the U.S. dollar index to strengthen sharply and Non-US currencies were generally under pressure.
The reporter learned that due to the higher-than-expected US inflation data, many Wall Street investment institutions have raised the peak interest rate of the Federal Reserve.
NatWest Markets interest rate analyst Kevin Cummins released a latest report stating that given the severe inflation situation and the unexpected rise in U.S. monthly core inflation data, the Federal Reserve may raise the federal funds terminal interest rate to 5.75%.
Goldman Sachs expects the Federal Reserve to raise interest rates further this year, by 25 basis points in March, May and June in response to stronger economic growth.
The latest data from Refinitiv shows that Wall Street traders currently expect the Federal Reserve to raise the benchmark interest rate to about 5.4% by July, but this value was only 5.2% two weeks ago.
A U.S. stock broker revealed to reporters that there was a significant increase in the number of hedge funds buying financial derivatives betting on the Federal Reserve to raise interest rates to 5.8% in the over-the-counter interest rate options market this week. Correspondingly, as the market expects the Federal Reserve to further raise interest rates, their efforts to cover short positions in the U.S. dollar have increased, causing the U.S. dollar index to continue to rise and forcing non-U.S. currencies to bear greater correction pressure.
It is worth noting that although the strong rebound of the US dollar index has caused the exchange rates of non-US currencies to fall sharply, the RMB exchange rate still appears relatively strong. As of the week of February 24, the CFETS RMB exchange rate index was at 100.24, a slight increase from 98.67 at the end of last year, indicating that the RMB remains “strong” against a basket of currencies.
The reasons are: first, northbound funds continue to flow into A-shares, which invisibly pushes up the valuation of the RMB exchange rate by more than 200-400 basis points; second,�China’s economic fundamentals continue to improve, causing macroeconomic hedge funds to still set the RMB equilibrium exchange rate valuation at around 6.8.
A large macroeconomic hedge fund manager on Wall Street pointed out to reporters that after the Federal Reserve started its interest rate hike cycle and the Russia-Ukraine conflict broke out last year, a major new change in the foreign exchange market was that exchange rate fluctuations increased significantly. In this case, on the one hand, they will not follow the trend to avoid investment mistakes; on the other hand, they will buy financial derivatives based on the equilibrium exchange rate valuation, betting on exchange rate volatility to expand profits, and achieve relatively stable investments. Return.
He bluntly stated that most of the world’s large investment institutions currently expect that the continued improvement of China’s economic fundamentals will lead to a steady appreciation of the RMB exchange rate, so they have no intention of short-selling the RMB to make profits.
The RMB exchange rate may resume its appreciation trend in the future.
Tong Haoxiang, a researcher at the Financial Markets Department of China Construction Bank, believes that this round of depreciation is mainly due to the following three reasons.
First, the strong economic expectations that drove appreciation in the early stage gradually faded. The appreciation trend of the RMB in November 2022 is mainly driven by the market’s expectations for a strong economic recovery. As strong expectations gradually transform into strong reality, the trend tends to be dull as the mood eases. At this time, many economic data in the United States exceeded expectations. While inflationary pressures have not subsided, the Federal Reserve stated that it will continue to maintain tightening policies, and the U.S. dollar index strengthened, putting pressure on the RMB exchange rate.
Second, the strength of foreign exchange settlement has weakened. Before the Spring Festival in January, the demand for foreign exchange settlement was relatively strong, which supported the warming of the RMB exchange rate. As the RMB continues to appreciate, the demand for foreign exchange settlement has declined. Most foreign exchange settlement orders choose to hold the currency and wait and see, buy foreign exchange when the market is high, and settle foreign exchange when the market is low. The lack of directional force makes the RMB exchange rate lack support.
Third, the market is looking forward to future policy efforts, and trading is relatively cautious. According to historical experience, when policies are usually relatively flat, trading funds are more cautious and trading is light, which does not help support the RMB exchange rate.
Looking ahead, the economic recovery process will promote a stronger economy, and the gradual release of policies after the two sessions will also help enhance market confidence.
Recently, economic recovery continues, resumption of work continues to accelerate, and new home sales have turned positive. The focus of restoration has gradually shifted from previous consumption to resumption of work and real estate.
High-frequency data shows that as of the week of February 26, the congestion delay index in 100 cities increased by 0.7% month-on-month. Subway passenger volume in nine key cities increased by 6.8% month-on-month, returning to 111.5% of the 2019 level. As of February 24, the transaction area of commercial housing in 30 cities increased by 30.1% month-on-month. As of February 19, the listing price and volume index of second-hand housing sales increased by 0.3% and 0.1% respectively from the previous month. A improving economy will help strengthen the RMB exchange rate, and the market is waiting for the release of key economic data such as February PMI.
On the other hand, changes in policy trends will also gradually become clear. The successive introduction of incremental policies will boost market sentiment and return the RMB exchange rate to an upward trend. When the trend reverses again, the activity of foreign exchange settlement orders and trading orders that had been cautious before will increase significantly, strengthening the appreciation trend of the RMB exchange rate.
Foreign trade companies increase foreign exchange hedging
Although the RMB exchange rate has given up its gains this year, foreign trade companies appear “calm and relaxed.”
A financial director of a bulk commodity import company told reporters that when the RMB exchange rate rose to around 6.7 in mid-January, they took the opportunity to buy a forward RMB swap transaction with an execution price of 6.75-6.8 and multiple installments for exercise. Lock in the cost of purchasing foreign exchange. Based on the current RMB exchange rate of around 6.9390, they have now achieved profits from foreign exchange hedging, effectively reducing the cost of purchasing foreign exchange.
Reporters have learned from many sources that as the RMB exchange rate has retreated to the 6.9 level, export companies have recently increased their efforts to settle foreign exchange on highs.
A person in charge of an export company told reporters that since last week, they have gradually increased their efforts in foreign exchange settlement because the current RMB exchange settlement price is sufficient for the company to achieve its expected revenue and profit targets.
“Previously, whenever the RMB exchange rate was about to ‘break 7’, I would wait for the RMB exchange rate to fall further before settling the exchange in order to maximize profits. However, as the RMB exchange rate fluctuated in both directions for many times, I found that speculating on a sharp fall in the RMB exchange rate was not possible. Achieving ideal returns will actually save me a lot of money. Now I have learned well that as long as the RMB exchange rate reaches the company’s revenue and profit target, I will quickly settle the exchange and be safe.” He emphasized.
Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that since last year, the willingness of market entities to settle foreign exchange has been basically stable, and the rational trading model of “settling foreign exchange on highs” has been generally maintained. The settlement rate in 2022 (i.e., the ratio of the foreign exchange sold by customers to the bank to the customer’s foreign exchange income) will be 67%, an increase of 1 percentage point from 2021. In addition, many market entities proactively managed exchange rate risks last year, carried out more hedging operations, and became significantly more adaptable to exchange rate fluctuations. In 2022, the proportion of corporate foreign exchange hedging will be 24%, an increase of 11 percentage points from 2016.
A person from the cross-border business department of a joint-stock bank said bluntly that they are currently extending foreign exchange hedging services to more small and medium-sized foreign trade companies, and are working with relevant departments to reduce handling fees and guarantee fees to provide foreign exchange hedging operations for small and medium-sized foreign trade companies. “Burden reduction”.
“In view of the sharp two-way fluctuations in the RMB exchange rate again this year, foreign trade companies have recently begun to inquire about foreign exchange risk reversal combination option products. This product can effectively hedge the exchange rate risks caused by the sharp fluctuations in the RMB exchange rate.” He pointed out.
The RMB exchange rate has fluctuated sharply in both directions again since the beginning of this year. Recently, the number of foreign trade companies inquiring about foreign exchange risk reversal portfolio option products has begun to increase. Because this product can effectively hedge the exchange rate risks caused by the sharp fluctuations in the RMB exchange rate. ” he pointed out.
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