On November 22, the onshore and offshore RMB exchange rates against the US dollar remained strong, reaching a maximum of 7.1356 and 7.1330, respectively, at a four-month high. At the same time, the central parity rate of the yuan against the US dollar rose 152 basis points to 7.1254 on the same day, hitting a new high since June 19, and the single-day rise was the largest since mid-July. The renminbi's strong recovery has been the main trading theme in foreign exchange markets in November. Since November, the onshore and offshore RMB exchange rates have changed the sideways trend of more than two months before and opened a sharp rebound, rising by about 2,000 points, up 2.45% and 2.78% respectively. Why is the RMB exchange rate enjoying an obvious rebound at this point? From the perspective of internal and external factors, the combined effects of five factors jointly promote the rise of RMB exchange rate.
First, the global central bank tightening cycle is coming to an end, and the strength of the dollar is encountering headwinds. Recently, the Federal Reserve, Bank of Canada, Bank of England and European Central Bank all "stayed on hold" and kept interest rates unchanged at their latest meetings. Several institutions believe that the global interest rate hike cycle may be over. Since November, the dollar index has retreated more than 2.5 percent. Last week, the dollar index fell 1.8 per cent. "This is one of the steepest dollar sell-offs since July." The Office of the Chief Investment Officer (CIO) at UBS Wealth Management said the dollar also saw further losses at the start of the week as markets continued to reassess expectations for US interest rates. But judging from the combination of rate cut expectations and market uncertainty, the dollar is more likely to consolidate in early 2024 and remain range-bound relative to major currencies.
Second, with the peak of US bond yields, the interest rate spread between China and the US is expected to gradually converge, and internal and external medium and long-term factors are positive for RMB assets. At present, Treasury yields have fallen significantly, and the 10-year Treasury yield has fallen from its previous level of 5% to near 4.4%. David Scutt, senior strategist at Gain Group, said while there is still uncertainty about the outlook for the U.S. economy, whether inflation will return to target and how the Fed might respond, there is growing evidence that Treasury yields have peaked in this cycle.
Third, the stabilization and recovery of the RMB may trigger a bearish market, further promoting the RMB exchange rate upward. "The short squeeze is the main reason behind the rally, with positive signals from geopolitical relations and expectations of the end of interest rate hikes overseas combining to push short positions in the renminbi to unwind." Matt Simpson, senior analyst at Gain Group, said that the recent recovery in Chinese economic data has stabilized, and investors are also focusing on the key signal sent by the central parity rate of the yuan.
Fourth, from the perspective of internal factors, since the beginning of this year, the stable exchange rate policy has continued to increase, and the financial management department has also continuously released positive signals for the RMB exchange rate to stabilize market expectations. During the year, the macro-prudential adjustment parameters of cross-border financing were raised, the foreign exchange reserve requirement ratio of financial institutions was lowered, and the issuance of offshore central bills were all important tools in the foreign exchange toolbox. The Central Financial Work Conference also proposed to strengthen the management of the foreign exchange market and keep the RMB exchange rate basically stable at a reasonable and balanced level. The industry believes that the relevant voices and policy measures have released a clear signal of stable exchange rate, which helps to stabilize exchange rate expectations.
Fifth, in the final analysis, the recent rise of the RMB exchange rate is a vote of confidence by the market for China's economic development. Since the third quarter, major macroeconomic indicators such as consumption, investment and corporate profits have shown marginal improvement, indicating that the signal of stabilization of the domestic economy has become increasingly clear. The positive outlook for the economy has led to a marked improvement in currency market sentiment.
After the continuous appreciation, the upward space of the RMB exchange rate has been opened. Cicc research report believes that this round of RMB exchange rate recovery market is likely not over. Looking at the end of the year, there are still several factors such as seasonal foreign exchange settlement, reflexivity, export recovery and the possibility of further downside of the US dollar index to support further strengthening of the RMB exchange rate. Industrial research said that the volume of foreign exchange orders to be settled in the future and the volume of foreign exchange market are still important factors in determining the depth of this round of RMB exchange rate rebound. The latest foreign exchange settlement and sales data show that the pending settlement of foreign exchange orders continues to accumulate, and it is expected that the rebound of the RMB will continue in December and January 2024.
