The RMB exchange rate is expected to return below 7.0 by the end of the year

Wind data shows that since July, the U.S. Dollar Index has continued to decline, and on the 12th, it fell 1.06% sharply. At the same time, there has been a significant counterattack on the onshore and offshore RMB exchange rate against the US dollar.

On July 14th, the onshore and offshore RMB continued to rise sharply against the US dollar, both rising above the 7.13 mark. As of 14:20 pm on the 14th, the offshore RMB was trading at 7.1298 against the US dollar, rising by 1557 points from its low of 7.2855 on June 30th; The onshore Chinese yuan was at 7.1230 against the US dollar, rising by 1459 points from its low of 7.2689 on June 30.

In addition, on the 13th, the central parity rate of the Chinese yuan against the US dollar increased by 238 basis points to 7.1527. Since July 7th, the central parity rate of the Chinese yuan against the US dollar has been raised for five consecutive trading days, with a cumulative increase of 571 basis points.

Analysts say that this round of RMB exchange rate depreciation has basically come to an end, but there is little possibility of a strong reversal in the short term. It is expected that the trend of the RMB against the US dollar in the third quarter will be mainly volatile.

The weakening of the US dollar or the easing of the pressure on the periodic depreciation of the Chinese yuan

After entering July, the trend of pressure on the RMB exchange rate has weakened. In the first week of July, the onshore RMB exchange rate rebounded by 0.39% in a single week. After entering this week, the onshore RMB exchange rate broke through the 7.22, 7.21, and 7.20 levels on Tuesday (July 11th), with a daily appreciation of over 300 points.

From the perspective of market transaction activity, “the market transaction was more active on July 11, and the spot market transaction volume increased by 5.5 billion dollars to 42.8 billion dollars compared with the previous trading day.” According to the analysis of the transaction personnel from the financial market department of China Construction Bank.

The temporary easing of the pressure of RMB depreciation. From the perspective of reasons, Wang Yang, an expert in foreign exchange strategy and general manager of Beijing Huijin Tianlu Risk Management Technology Co., Ltd., said, “The fundamentals have not changed fundamentally, but are more driven by the weakness of the U.S. Dollar Index.”

Recently, the U.S. Dollar Index fell for six consecutive days. As of 17:00 on July 13, the U.S. Dollar Index was at the lowest level of 100.2291, close to the psychological threshold of 100, the lowest level since May 2022.

As for the decline of the U.S. Dollar Index, Zhou Ji, a macro foreign exchange analyst at Nanhua Futures, believes that the US ISM manufacturing index previously released is less than expected, and the manufacturing boom continues to shrink, with signs of slowing down in the US employment market emerging.

The US dollar is approaching the 100 mark. Previous data shows that the previous U.S. Dollar Index fell below 100 in April 2022.

Wang Yang believes that this round of U.S. Dollar Index may fall back below 100. “With the end of the Federal Reserve’s interest rate increase cycle this year, it is only a matter of time before the U.S. Dollar Index falls below 100.76. Once it falls, it will trigger a new round of decline in the dollar,” he said.

The RMB exchange rate is expected to return below 7.0 by the end of the year

Wang Youxin, a researcher at the Bank of China Research Institute, believes that the rebound of the RMB exchange rate has more to do with the U.S. Dollar Index. He said that the non farm data is significantly lower than the previous and expected values, indicating that the US economic recovery is not as strong as imagined, which has cooled market expectations for the Federal Reserve to continue raising interest rates in September.

However, the RMB exchange rate may not have reached the turning point yet. Currently, the Federal Reserve’s interest rate hike cycle has not ended, and the peak interest rate may continue to rise. In the short term, it will still support the trend of the US dollar, and it is expected that the RMB will show more range fluctuations in the third quarter. With the improvement of the domestic economic recovery situation and the increasing downward pressure on the European and American economies, the RMB exchange rate will gradually rebound from the bottom in the fourth quarter He said.

Since removing external factors such as the weak US dollar, Wang Yang said, “The recent fundamental support for the (RMB) may also come from the market’s expectations for future economic stimulus plans being formed

The recent report released by ICBC Asia also mentioned that a package of policies is expected to continue to be implemented in the second half of the year, with a focus on promoting domestic demand, stabilizing real estate, and preventing risks, which will drive up the slope of short-term economic recovery. In the short term, there may still be some fluctuation pressure on the RMB, but the trend of economic, policy, and expectation differences is narrowing. In the medium term, the momentum of the RMB’s trend recovery is gradually accumulating.

“On the whole, the stage of the greatest pressure on RMB devaluation may have passed.” Feng Lin, a senior analyst of Orient Jincheng, predicted that the momentum of economic recovery in the third quarter is expected to strengthen, coupled with the possibility that the U.S. Dollar Index will continue to be volatile and weak on the whole, and the pressure on RMB devaluation will tend to slow down in the second half of the year, which does not rule out the possibility of phased appreciation. From the perspective of fundamental trend comparison, the RMB exchange rate is expected to return below 7.0 before the end of the year.

Post time: Jul-17-2023