On the 25th, the Chinese yuan exchange rate suddenly experienced a “big explosion”.
As of 17:30 on July 25th, the onshore Chinese yuan to US dollar exchange rate (CNY) and offshore Chinese yuan to US dollar exchange rate (CNH) in the domestic market and overseas market respectively hit 7.2318 and 7.2306, up 347 basis points and 323 basis points respectively from the previous trading day. During trading, they reached their highest points since mid May at 7.2050 and 7.2020, respectively, with the largest intraday increase in both domestic and overseas Chinese yuan exceeding 600 basis points.
Why has there been such a significant increase？
Especially in the afternoon, the continuous rise of the renminbi came too suddenly, catching the foreign exchange market off guard, “said a Hong Kong bank foreign exchange trader. In his opinion, the sudden surge in domestic and foreign RMB exchange rates on July 25th is somewhat unusual – after all, the slight decline of the US dollar index from 104.4 to 104.2 on that day may not necessarily “support” such a large increase in the RMB.
According to multiple investment institutions, the sudden and significant rise of the Chinese yuan both domestically and internationally on July 25th may be influenced by four factors:
One is that recently, relevant departments of the central bank have taken a series of “interest rate cuts” measures, which have made overseas financial institutions bullish on the future development prospects of the Chinese economy and have increased their long positions in the renminbi. The most obvious sign is that on July 25th, the offshore RMB exchange rate was higher than the onshore RMB exchange rate for the first time, indicating that overseas capital has a higher bullish enthusiasm for the RMB exchange rate than domestic institutions.
The second is the “catch-up effect” brought about by the sharp rise in the Japanese yen exchange rate. In the past two weeks, the Japanese yen has surged by about 5.6% against the US dollar, once reaching the integer level of 152 from 160. This has largely reversed the financial market’s view that there is greater pressure on Asian currencies to depreciate, prompting many overseas investment institutions to dare to buy Asian currencies with good economic fundamentals such as the Chinese yuan.
Thirdly, the effect of China’s high foreign trade surplus in the first half of the year has begun to ferment. Previously, influenced by factors such as the Federal Reserve’s delay in interest rate cuts and the strong recovery of the US dollar, the market generally believed that the RMB exchange rate was trending downwards. However, as the pace of interest rate cuts by the Federal Reserve approaches the end of the strong cycle of the US dollar, financial markets have begun to turn their attention to China’s good foreign trade data and trade surplus in the first half of the year, betting on the rise of the RMB exchange rate.
The fourth is that the chain effect of Trump’s deal continues to spread. As the market expects Trump’s chances of winning the election to increase, Wall Street investment institutions are increasingly concerned about the possibility of a weak US dollar being implemented by the new US government in the future, and are pressuring the Federal Reserve to accelerate the pace of interest rate cuts. As a result, many overseas capital have begun to buy up the Chinese yuan in advance as a “response”.
Will the pressure on the RMB exchange rate disappear?
According to Securities Times, analysts believe that the current situation still largely depends on the strength of the US dollar and Japanese yen. Although there has been some slight adjustment in the US dollar index recently, the magnitude is not significant, and this is happening against the backdrop of significant strength in both the Chinese yuan and the Japanese yen.
Thursday’s swap pricing showed a 58% chance of the Bank of Japan raising interest rates by 15 basis points before July 31, up from around 0.29% last week. If Japan raises interest rates, the interest rate gap between Japan and the United States will still remain at around 5 percentage points. Based on current sentiment and data, the appreciation of the Japanese yen may not come to a temporary end until the end of this month. Judging from the correlation between the trend of the Chinese yuan and the Japanese yen, the Chinese yuan may also follow suit and strengthen until this point.
It is worth noting that in the first half of 2024, the Chinese yuan played the role of a “stability anchor” for Asian currencies. According to Bank of China Securities, the central parity rates of the Chinese yuan against the Japanese yen, Korean won, Thai baht, Malaysian ringgit, and Singapore dollar rose by 12.2%, 6.3%, 6.3%, 2.1%, and 1.9%, respectively.
In addition, on July 19th, the People’s Bank of China emphasized the need to improve the managed floating exchange rate system based on market supply and demand, adjusted with reference to a basket of currencies, enhance exchange rate flexibility, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level when conveying the spirit of studying the Third Plenary Session of the 20th Central Committee. From this, it can be seen that the direction of market-oriented reform of the RMB exchange rate and the short-term intention of the central bank to stabilize the exchange rate policy have not fundamentally changed.
Post time: Jul-29-2024