Since the end of May 2020, the RMB exchange rate against the US dollar has continued to appreciate, with the cumulative increase in the third quarter reaching 3.71%, the largest quarterly increase since the first quarter of 2008. As of October 9, the high point of the onshore RMB exchange rate against the US dollar had appreciated by 6.5% from the low reached on May 27, while the offshore RMB exchange rate against the US dollar had appreciated by 7.2%. Why will the RMB exchange rate against the US dollar first depreciate and then rise in 2020? Can the trend of RMB exchange rate appreciation continue?
We can judge the trend of the RMB exchange rate from the factors affecting the exchange rate. Looking back from the beginning of 2020 to the present, the COVID-19 epidemic has caused the global economy to fall into a significant recession. The epidemic broke out in China first, which caused the RMB exchange rate to depreciate significantly against the US dollar in the first quarter. This coupled with the outbreak of a US dollar liquidity crisis in the international financial market caused the US dollar to emerge. Sexuality is strengthened. In the second and third quarters, as the epidemic in China was gradually brought under control, China took the lead in resuming work and production, while economies such as Europe and the United States continued to tolerate the epidemic, and China’s economy took the lead in recovering, leading the way for the RMB to resume appreciation against the US dollar.
Three major factors affecting the trend of the RMB exchange rate
The short-term impact on the exchange rate Factors include the interest rate differential between the two countries, inflation levels and international capital flows, while factors affecting the long-term trend of the exchange rate include economic growth, monetary policy and the level of international trade. The long-term appreciation trend of the RMB exchange rate may have begun, but the short- and medium-term trend may face recurrence. The main logic of judgment is as follows:
First, China’s epidemic has been well controlled, and the economy The recovery is leading globally. Since the peak of the epidemic in China was ahead of other key countries in the world, the GDP growth rate of -6.8% in the first quarter has become the bottom of the economy for the whole year. The outbreak of the epidemic in Europe and the United States was relatively late, and the economy only started to restart in May. The bottom of the economy is likely to appear in the second quarter. In addition, due to the effective prevention and control of the epidemic in China, there has not been a second outbreak like the European and American countries. Therefore, China is leading the world in the pace of recovery, which supports its own exchange rate.
If we use Chinese and American manufacturing PMI data to measure the difference in economic recovery between the two countries, China’s official manufacturing PMI rose to 51.5% in September, while the U.S. ISM PMI fell back to 55.4 %, the previous value was 56%, which reflects the slowdown in the US economic recovery.
Second, China’s currency normalization is much faster than that of the United States. After the outbreak, European and American central banks significantly increased the scale of asset purchases, and their balance sheets expanded rapidly. Relatively speaking, under China’s “stabilizing currency + easing fiscal” combination, this round of money supply still aims to be “reasonably sufficient”. Recently, the governor of China’s central bank wrote an article stating that since 2020, the monetary policies of major developed countries have all entered the near-zero interest rate and negative interest rate ranges. Strong stimulus policies have a certain effect in the early stage, but the marginal utility is diminishing and the difficulty of exit is increasing. In the long term, it may stimulate debt expansion and asset bubbles, solidify the distortion of the economic structure, affect the fairness of income distribution, and increase systemic risks. In comparison, China’s monetary policy adheres to a prudent orientation and remains within the normal monetary policy range. It is one of the few countries among the world’s major economies that implements normal monetary policies.
In addition, the widening interest rate gap between China and the United States is also conducive to the strengthening of the RMB exchange rate. As of October 9, the 10-year treasury bond yield spread between China and the United States rose to 2.3978 percentage points, having fallen to 1.19 percentage points in February. Statistics show that the exchange rate of the US dollar against the offshore RMB and the interest rate differential between China and the United States are highly negatively correlated.
Third, China’s exports are gradually recovering, and the foreign trade surplus is also repairing. On the capital account side, compared with the Fed’s monetary policy that cannot be normalized for a long time, China’s policy stimulus is far less than that of Western developed countries. Moreover, China has increased its financial opening up and the net capital inflow has increased, which is conducive to the strengthening of the RMB exchange rate. .
It is worth noting that China, as a representative of emerging economies, has always used the RMB exchange rate as a risk allocation. In recent years, the RMB exchange rate no longer fluctuates in the same direction as equity assets. Instead, it has certain risk-averse properties. That is, like U.S. dollar assets, it appreciates when the market is highly volatile. This is mainly due to the large proportion of China’s economy. It has something to do with better development prospects. In addition, China’s export share of world trade has increased in recent years, which has increased the attractiveness of RMB assets. The strengthening of the RMB exchange rate is supported by economic growth fundamentals.
Two reasons have caused the RMB exchange rate to retreat slightly in the short term
Of course , in the short term, there are two factors that may cause the appreciation trend of the RMB exchange rate to be suspended or even give back the gains slightly: First, the central bank intends to guide the appreciation trend of the RMB to slow down. The People’s Bank of China has decided to lower the foreign exchange risk reserve ratio for forward foreign exchange sales business from 20% to 0 starting from October 12, 2020. The foreign exchange risk reserve system was first created in October 2015. The core is that banks need to pay a reserve to the central bank when making forward foreign exchange sales to customers. Its essence is to reduce the transaction costs of banks when making forward foreign exchange sales. Social demand for foreign exchange thus curbs expectations of depreciation of the RMB exchange rate. Once the foreign exchange risk reserve ratio for forward foreign exchange sales business is reduced,�0, which is conducive to reducing the transaction costs of financial institutions in forward foreign exchange sales, making the RMB exchange rate tend to fluctuate in both directions. Second, the U.S. election brings uncertainty, and the U.S. dollar exchange rate may benefit from rising market risks and rebound.
Therefore, from a strategic point of view, the author recommends using the CME Group’s offshore RMB futures contract (CNH) to hedge the risk of short-term corrections in the RMB exchange rate and to capture investments that can capture the long-term appreciation of the RMB exchange rate. Chance. As trading in CME Group FX futures becomes increasingly active, we are seeing FX futures trading volumes, customer positions and open interest all hitting record levels. Data provided by CME Group shows that as of early September, total open interest across all currency pairs exceeded $210 billion. Liquidity has improved significantly in offshore RMB direct trading as well as in calendar spread trading, which, coupled with improved funding efficiency through margin write-offs and flexible execution technology, has resulted in higher trading volumes and growing open interest. </p
