The central bank solemnly warns speculators: Don’t gamble, you will lose if you gamble for a long time! The offshore RMB once fell below 7.26, but quickly rose by 300 points after hearing the news! !
According to news from the People’s Bank of China on the evening of the 28th, on September 27, 2022, a video conference of the National Foreign Exchange Market Self-Discipline Mechanism was held. The meeting analyzed the recent operation of the foreign exchange market and deployed work related to strengthening self-discipline management. Liu Guoqiang, deputy governor of the People’s Bank of China and chairman of the China Foreign Exchange Market Steering Committee (CFXC), attended and delivered a speech.
In recent days, the U.S. dollar index has been too strong, hitting a 20-year high, and the RMB exchange rate against the U.S. dollar has fallen in both the offshore and onshore markets.
On September 28, the offshore RMB exchange rate against the U.S. dollar fell below 7.18, 7.19, 7.20, 7.21, 7.22, 7.23, 7.24, 7.25 and 7.26, setting a new low since 2019. As of press time, it had dropped as low as 7.2674, once falling by more than 900 points. After the central bank released the news, the offshore RMB exchange rate quickly rose by more than 300 points.
It is also worth mentioning that on September 28, the central bank’s big move to stabilize the market—the increase in the foreign exchange risk reserve ratio for forward foreign exchange sales business from 0 to 20% officially came into effect. As the RMB falls below 7.2, coupled with the current 20% additional cost of purchasing foreign exchange, some irrational or “herding” behaviors may be suppressed.
Central Bank: Don’t bet on unilateral appreciation or depreciation. If you bet for a long time, you will lose.
On September 27, 2022, a video conference of the National Foreign Exchange Market Self-Discipline Mechanism was held.
The meeting pointed out that the RMB exchange rate has remained basically stable at a reasonable and balanced level since this year. The CFETS RMB exchange rate index is basically unchanged from the end of 2021. The exchange rate of RMB against the US dollar has depreciated, but the depreciation rate is only half of the appreciation of the US dollar during the same period; the RMB has appreciated significantly against the euro, pound, and Japanese yen, making it one of the few strong currencies in the world.
The meeting emphasized that the foreign exchange market is of great importance and maintaining stability is the top priority. The RMB exchange rate remains basically stable and has a solid foundation. Compared with many economies facing the risk of stagflation, my country’s economy generally continues to recover and develop, price levels are basically stable, and the trade surplus is expected to remain high. As the effects of macro policies emerge, the economic fundamentals will become more solid. The current RMB exchange rate formation mechanism is suitable for China’s national conditions and can give full play to the role of the “two hands” of the market and the government. It has withstood the test of multiple rounds of external shocks in history. The People’s Bank of China has accumulated rich response experience and can effectively manage market expectations. The current operation of the foreign exchange market is generally standardized and orderly, but there are also phenomena such as a small number of companies following the trend of “foreign exchange speculation” and financial institutions operating in violation of regulations. Guidance and correction should be strengthened. We must realize that the exchange rate point is unpredictable and two-way floating is the norm. Do not bet on unilateral appreciation or depreciation of the RMB exchange rate. If you bet for a long time, you will lose.
The meeting required that member units of the self-regulatory mechanism should consciously maintain the basic stability of the foreign exchange market and resolutely curb the fluctuations of the exchange rate. Quoting banks must effectively maintain the authority of the central parity rate of the RMB exchange rate; banks themselves must reasonably carry out proprietary transactions based on the principle of risk neutrality and provide real liquidity to the market; member units must further strengthen the publicity and promotion of risk neutrality for enterprises and financial institutions. Guide and further improve the level of services that help companies avoid risks; relevant departments should strengthen supervision, management, monitoring and analysis, strengthen expectation management, and curb speculation.
Relevant departments and bureaus of the People’s Bank of China and the State Administration of Foreign Exchange, the Shanghai headquarters of the People’s Bank of China, and core members of the national foreign exchange market self-regulatory mechanism attended the meeting.
Offshore RMB rose over 300 points in the short term
On September 28, the offshore RMB once fell 900 points, falling below the 7.26 mark. Shortly after the news from the central bank came out, both the onshore and offshore RMB regained the 7.24 mark against the US dollar. Among them, the offshore RMB once rose by more than 300 points.
The onshore RMB has also recovered somewhat.
Since the beginning of this year, the RMB exchange rate against the US dollar has fallen by more than 13% in both onshore and offshore markets. In order to stabilize foreign exchange market expectations and strengthen macro-prudential management, the central bank announced on September 5 and September 26 respectively that it would lower the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points and increase the foreign exchange risk reserve ratio for forward foreign exchange sales business from 0 to 0. Increased to 20%. On September 28, the foreign exchange risk reserve ratio for forward foreign exchange sales business was raised from 0 to 20%, which officially took effect.
As far as the foreign exchange risk reserve ratio for forward foreign exchange sales business is concerned, the “foreign exchange sale” is from the bank’s perspective and corresponds to the “foreign exchange purchase” of enterprises or individuals. When a company or individual has foreign exchange needs at a certain time in the future, they can buy foreign exchange now, or they can sign a forward agreement with a financial institution to lock in the exchange rate. For financial institutions, it is forward foreign exchange sales business. Currently, financial institutions generally pass on 20% of the additional costs to customers.
According to a report on the 28th, the reporter learned that if the 20% risk reserve for forward foreign exchange sales is not taken into account, the price of forward foreign exchange purchases by enterprises is higher thanThe spot price is much cheaper. Wind data shows that the one-year forward price of USD/CNY is currently 7.069, and the 18-month forward price is 6.9932. Many traders from Chinese and foreign banks also mentioned to reporters before that the price difference can basically reach 1,400 points.
However, as the RMB falls below 7.2, coupled with the current 20% additional cost of purchasing foreign exchange, some irrational or herding behavior may be suppressed.
Enterprises are rational in settling foreign exchange during high times
Operational Support Exchange Rate Valuation
Although the RMB exchange rate fell below the 7.2 integer mark, corporate exchange rate operations were relatively stable.
According to reports, “After the RMB exchange rate fell below 7.2 on the 28th, the number of export companies choosing to settle foreign exchange on the rise increased compared with last week, but this helped boost RMB demand and the smooth fluctuation of the RMB exchange rate.” A joint-stock bank financial market Ministry sources told the 21st Century Business Herald reporter. In comparison, due to the impact of the central bank’s increase in the foreign exchange risk reserve ratio for forward foreign exchange sales on September 26, the emergency foreign exchange purchase operations of import enterprises decreased significantly on September 28, and there was no phenomenon in the foreign exchange market that “foreign exchange purchases are much higher than foreign exchange settlements.” “The clearing problem.
He believes that this is closely related to the fact that more and more companies have done foreign exchange hedging operations in advance. As early as July and August, in view of the continued sharp interest rate hikes by the Federal Reserve and the rising US dollar index, many importing companies locked in the exchange prices of most of the foreign exchange purchases through forward foreign exchange swap transactions early, leaving only very little foreign exchange risk exposure. mouth, allowing them to calmly cope with the RMB falling below 7.2.
At the same time, more and more export companies are increasingly aware of exchange rate risk neutrality. They no longer deliberately wait for the RMB exchange rate to fall below a specific point before settling foreign exchange, but instead “save it in advance” according to their own requirements for exchange settlement and hedging income. “.
“Whether it is 7 or 7.2, more and more foreign trade companies now regard them as ordinary exchange rate points, and they are no longer an important psychological point that affects foreign exchange trading sentiment. This makes foreign trade companies increasingly follow suit and speculate on exchange rate operations. The reduction will help the foreign exchange market continue to operate smoothly.” said the above-mentioned person from the Financial Market Department.
The reporter learned that more and more foreign trade companies are currently actively promoting cross-border trade settlement in RMB to directly avoid the risk of exchange losses caused by exchange rate fluctuations.
“Currently, many overseas traders are very interested in holding RMB, because compared with the euro, Japanese yen, and pound, which have fallen by more than 20% during the year, the RMB is still strong in major non-U.S. currencies. Overseas traders can reserve RMB positions to hedge non-U.S. currencies. The risk of greater depreciation.” A head of the cross-border business department of a state-owned bank told reporters.
Yuan holds steady against basket of currencies
On September 21, local time, the Federal Reserve announced an interest rate decision, raising the federal funds rate to 3% to 3.25% and hitting the highest level since early 2008. Statistics show that this is the fifth time the Federal Reserve has raised interest rates this year and the third consecutive 75 basis point hike, marking the largest intensive rate hike since 1981.
On the evening of September 22, the offshore RMB fell below the 7.1 mark against the US dollar, falling about 260 basis points during the day; the onshore RMB once fell to 7.0953.
As the yen, euro, and pound collapsed, the dollar index became more and more powerful. All three account for a large proportion in the composition of the U.S. dollar index.
On September 28, the U.S. dollar index once reached 114.79, an increase of more than 20% in the past year. The previous high of the US dollar index was around 120 in January 2002. As of last week, based on the increase over the past year, the U.S. dollar has appreciated by 17.43% against the euro, 20.84% against the pound, 10.54% against the Australian dollar, 21.15% against the Korean won, and 29.95% against the Japanese yen. The U.S. dollar has appreciated against the RMB by 10.36%.
According to The Paper, Zhongtai Securities pointed out that the recent continuous interest rate hikes by the Federal Reserve have caused the U.S. dollar index to soar, and non-U.S. currencies have generally depreciated sharply relative to the U.S. dollar. Among them, the RMB exchange rate is relatively strong relative to other countries, and the exchange rates of major developed countries such as the euro, pound, and yen are relatively strong. The degree of currency depreciation is even more exaggerated. Since the end of the Fed’s interest rate hike cycle has not yet been confirmed and the fundamentals of the European economy are relatively weak, it is not ruled out that the US dollar index will continue to rise in the future. The divergence of monetary policies between China and the United States has also deepened the inversion of interest rates between China and the United States.
The yuan also remained stable against a basket of currencies, according to China Business News. This week, the CFETS RMB exchange rate index reported 101.59, down slightly from 102.09 last week, but almost the same as 102.14 at the beginning of the year, indicating that the RMB has basically remained stable against the currencies of its major trading partners, and the depreciation is mainly due to the strengthening of the US dollar index.
CITIC Futures pointed out that the trend appreciation of the US dollar and the trend weakening of my country’s exports have put pressure on the RMB to depreciate during the year. Continuing to cut interest rates is not conducive to maintaining the stability of the RMB exchange rate, so it is unlikely that the central bank will cut interest rates during the year.
Minsheng Securities pointed out that the main triggers for the current exchange rate depreciation are the adjustment of the pace of interest rate hikes by the Federal Reserve and the sharp decline in export growth. The rapid breakout of RMB 7 in early September was the result of the simultaneous action of the two. There is little chance that the two major factors will resonate again this year, and the period of the fastest depreciation of the RMB in the short term may have passed.
According to China Business News, the real effective exchange rate of the U.S. dollar is currently close to its high point since 2000. In terms of purchasing power parity, the U.S. dollar is actually quite “expensive,” especially relative to the euro, pound sterling, and Swedish krona. But this does not mean that the dollar will peak in the short term.
“In the long run, I believe the Federal Reserve can successfully control inflation. When the outlook for interest rates becomes clearer, the U.S. dollar is expected to weaken starting next year. But in the short term, the U.S. dollar bull market is not over yet, so we have recently raised our view on the U.S. dollar to bullish.” UBS said. Currently, expectations are rising that the U.S. dollar index will hit the 120 mark and break through a 20-year high.
According to China Business News, the real effective exchange rate of the U.S. dollar is currently close to its high point since 2000. In terms of purchasing power parity, the U.S. dollar is actually quite “expensive,” especially relative to the euro, pound sterling, and Swedish krona. But this does not mean that the dollar will peak in the short term.
“In the long run, I believe the Federal Reserve can successfully control inflation. When the outlook for interest rates becomes clearer, the U.S. dollar is expected to weaken starting next year. But in the short term, the U.S. dollar bull market is not over yet, so we have recently raised our view on the U.S. dollar to bullish.” UBS said. Currently, expectations are rising that the U.S. dollar index will hit the 120 mark and break through a 20-year high.
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