On August 29, the U.S. dollar index hit a 20-year high, and non-U.S. currencies adjusted one after another. The offshore RMB fell below 6.93 against the U.S. dollar, and the onshore RMB fell below 6.92 against the U.S. dollar, both hitting two-year lows.
Analysts generally believe that today’s decline in the RMB exchange rate is related to the hawkish statement by Federal Reserve Chairman Powell last Friday. Although the market had expected Powell to make a hawk at the annual meeting of global central banks in Jackson Hole, Powell and other Fed officials did not expect that he would actually perform a hawkish “chorus” and stage a “hawk upon hawk” performance.
Powell only delivered an 8-minute speech at the above-mentioned annual meeting of global central banks, but clearly conveyed a hawkish signal: the Federal Reserve will continue to unswervingly fight inflation, even at the cost of a certain amount of economic growth. Several other officials of the Federal Reserve are also “beating the drum” to encourage Powell, making it clear that the pace of raising interest rates cannot be stopped.
Specifically, Powell’s speech had three key points:
First, the current priority of the Federal Open Market Committee (FOMC) is to reduce inflation to the 2% target level. Second, although the decline in U.S. inflation data in July is gratifying, the single-month decline is far from enough to convince the committee that an inflection point in inflation has occurred. Third, restoring price stability may also require the Fed to maintain a tightening policy stance for some time. The lessons of history warn the Fed not to ease policy “prematurely”.
After Powell’s speech, U.S. federal funds rate futures suggested that the market believes that the probability that the Federal Reserve will raise interest rates by 75 basis points in September has increased from less than 50% to more than 60%. On Monday, August 29, federal funds futures showed that the probability of a 75 basis point interest rate hike in September had risen to more than 70%.
A CICC research report believes that the Federal Reserve still has a long way to go in combating inflation and advises investors not to have excessive expectations for the U.S. currency to return to easing. Recently, there is a view in the market that as the downward pressure on the U.S. economy increases, the Federal Reserve will slow down its interest rate hikes and start cutting interest rates sometime next year. This idea may be immature. Standing at the moment, we should not have too many extravagant hopes for the Fed to cut interest rates. In addition, Powell also mentioned that the June dot plot predicts that the federal funds rate will be slightly below 4% by the end of 2023. In view of this, the Federal Reserve is expected to continue to raise interest rates until 2023. If the non-farm payrolls and CPI data in August perform well, it does not rule out the possibility of raising interest rates again by 75BP at the interest rate meeting on September 22.
Why did the yuan fall?
Zhou Ji, a macro foreign exchange analyst at Nanhua Futures, told a reporter from the 21st Century Business Herald that the reason for this round of RMB downward adjustment is undoubtedly related to the recent strength of the U.S. dollar index and the central bank’s lowering of the LPR interest rate. The strength of the U.S. dollar index is mainly supported by several factors:
First, at the beginning of last week, some Federal Reserve officials continued to release hawkish speeches, especially Federal Reserve Chairman Powell’s remarks emphasizing continued tightening at the Jackson Hole Annual Meeting of Global Central Banks, which greatly raised the market’s expectations that the Federal Reserve will continue to adopt aggressive monetary tightening; second, The European energy crisis has resurfaced, and the market has once again ignited concerns about the economic prospects of the Eurozone. The euro is under pressure and the US dollar has benefited.
Wang Qing, chief macro analyst of Oriental Jincheng, analyzed to reporters that the RMB exchange rate against the U.S. dollar has fallen recently, but it is generally in a strong trend against non-U.S. currencies. There are two reasons behind this: First, the recent sharp appreciation of the U.S. dollar has caused the RMB exchange rate to be passive go lower. Since August 15, affected by the tough monetary policy stance of many Federal Reserve officials, the U.S. dollar index has turned from falling to rising, rising sharply by 3.43% in just 10 trading days. This is the main reason why the RMB depreciated by 2.22% against the U.S. dollar during the same period.
In fact, it can be seen from the fluctuation range of the exchange rate that the depreciation range of the RMB is significantly lower than the appreciation range of the US dollar, indicating obvious resilience. In other words, during this period, the RMB has appreciated to varying degrees against other major non-U.S. currencies such as the euro and the yen, and is generally on the strong side. Behind this is that my country’s exports have maintained strong growth recently, the domestic economy as a whole is on the track of recovery, and the market’s expectations for the stability of the RMB have increased.
Secondly, the central bank lowered its policy interest rate on August 15, driving the domestic 10-year government bond yield down by about 10 basis points. At the same time, after many Federal Reserve officials made hawkish statements, U.S. bond yields rose, and the interest rate differential between China and the United States inverted. Increase. This has partly contributed to the recent depreciation of the RMB against the US dollar. However, judging from the results, this factor has a relatively small impact and has not changed the overall operating trend of the RMB. In other words, the increasing difference in monetary policies between China and the United States brought about by the August interest rate cut is not the main reason for the recent decline of the RMB. It is expected that it may enhance confidence in the subsequent flexible adjustment of domestic macro policies.
There will still be pressure on the RMB exchange rate in the second half of the year
Wang Qing believes that there may still be some depreciation pressure on the RMB against the US dollar in the second half of the year. Looking forward, the U.S. dollar will remain phasedly strong. As the Federal Reserve continues to raise interest rates in the second half of the year, there is still room for the 10-year U.S. bond yield to rise, and the inversion in the interest rate differential between China and the U.S. is likely to further increase. However, as the momentum of domestic economic recovery strengthens and my country’s international balance of payments is expected to maintain a surplus, it is difficult to effectively gather expectations for RMB depreciation. In the second half of the year, the central exchange rate of RMB against the US dollar is expected to remain in the range of 6.7 to 6.9, especially the three major RMB exchange rate indexes. Will continue to maintain a strong operating trend. This meansThe pressure on the RMB to depreciate against the U.S. dollar within the country will not pose a substantial constraint on the flexible adjustment of macroeconomic policies.
It is reported that the exchange rate index, as a weighted average exchange rate, is mainly used to comprehensively calculate the changes in the weighted average exchange rate of a country’s currency against a basket of foreign currencies, and can more comprehensively reflect the changes in the value of a country’s currency. Compared with referring to a single currency, referring to a basket of currencies can better reflect the comprehensive competitiveness of a country’s goods and services, and can also better play the role of exchange rate in regulating imports and exports, investment and international balance of payments.
Zhou Ji said that the Federal Reserve’s September interest rate meeting is crucial for the trend of the RMB exchange rate in the second half of the year. At that time, the market’s expectations for the Federal Reserve’s interest rate hike may be adjusted, and after that, the trend of the foreign exchange market will be more uncertain. Prior to this, it is expected that the strength of the U.S. dollar index will continue, and the 110 line will be the key resistance level.
In his view, as the U.S. dollar index remains strong and the inversion of interest rate differentials between China and the U.S. will continue for some time, the RMB exchange rate will still face considerable depreciation pressure before the Federal Reserve’s interest rate meeting in September. If the U.S. economy, employment, and inflation data exceed expectations, or the Fed becomes more hawkish and raises interest rates more than expected, it is not ruled out that the RMB exchange rate will break through 7 within the year; however, if the above events do not go as expected, the depreciation pressure on the RMB exchange rate is expected to slow down. .
Although there will be some depreciation pressure on the RMB exchange rate in the future, analysts generally believe that companies should adhere to the concept of neutral exchange rate risk. Wang Qing believes that it is extremely difficult for foreign trade companies to accurately judge the direction of exchange rates. Therefore, both importing and exporting companies must adhere to the principle of financial neutrality and learn to use foreign exchange hedging tools such as forwards and options to manage exchange rate risks as soon as possible. Especially in the context of intensified currency market volatility currently and in the future, foreign exchange risk exposure can be appropriately reduced to avoid losses caused by “streaking” in exchange rate fluctuations, especially unilateral bets. Finally, for foreign trade companies, using RMB for settlement as much as possible is also an effective way to avoid exchange rate risks.
Zhou Ji suggested that the current uncertainty in the foreign exchange market is relatively large, and it is recommended that foreign trade companies establish the principle of risk neutrality, rationally use financial tools according to their own conditions, conduct foreign exchange exposure risk management in a timely manner, and must not “streaking”.