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The exchange rate skyrocketed!

2024-05-04 15:47

On May 3, the offshore RMB against the U.S. dollar once rose above the 7.19 mark and reached as low as 7.1853, a new high since March. The RMB has risen against the U.S. dollar for three consecutive days. The RMB exchange rate has risen by 800 points in the past seven trading days.
       Good news! Before the U.S. stock market opened on the 3rd local time, the latest U.S. non-farm payrolls report for April showed that employment growth slowed down and was far lower than market expectations, easing inflation concerns and increasing confidence in the Federal Reserve's expectations for interest rate cuts. Traders expect the Federal Reserve to cut interest rates ahead of schedule in September and may cut interest rates twice in 2024, which will further support the rise in the yuan exchange rate.

The fluctuation of the RMB exchange rate against the US dollar in the international foreign exchange market has always received widespread attention. Among them, the RMB exchange rate in the offshore market has often become one of the market focuses. This time, the offshore RMB exchange rate against the US dollar rose above 7.19. This change reflects the relative strength of the RMB in the foreign exchange market.

On Wednesday, after the Federal Reserve announced that it would continue to keep interest rates unchanged within the range of 5.25% to 5.5% and plan to slow down its balance sheet reduction plan from June, the U.S. dollar index fell for several days. CME's FedWatch tool shows money markets are pricing in a 58% chance of at least a 25 basis point rate cut in September, but a higher chance of a November rate cut at 69%.

On May 2, local time, the U.S. dollar index fell 0.25% to 105.3848, and non-U.S. currencies rose across the board. The offshore RMB against the U.S. dollar refreshed the intraday low to 7.2451 in early Asian trading, and once rose to 7.1952 during the session. It rose above 7.20 for the first time since March 14, rising 499 points from the intraday low. The offshore RMB pair rose throughout the day. The dollar rose 280 basis points to 7.2060.

The latest news, before the U.S. stock market opened on Friday local time, the April non-farm payrolls report released by the U.S. Department of Labor showed that employment growth in the United States slowed sharply, with 175,000 new jobs added, a drop of more than 315,000 from the previous month. 40%, which is far lower than market expectations of 240,000 new jobs. The data was lower than expected, easing market concerns about rising inflation. As the labor market cools significantly, the market has generally increased expectations that the Federal Reserve may soon start cutting interest rates.

Affected by this, traders have advanced their expectations for the Federal Reserve's first interest rate cut from November to September, and predict that the Federal Reserve will make two interest rate cuts of 25 basis points each in 2024, compared with the previous expectation of only one interest rate cut. This will further support the strengthening of the RMB.

RMB exchange rate remains resilient

  On April 16, China released the latest economic data showing that in the first quarter of this year, gross domestic product (GDP) increased by 5.3% year-on-year and 1.6% month-on-month. Affected by this, the RMB exchange rates at home and abroad have rebounded from intraday lows, indicating that China's economic fundamentals are steadily improving, which is driving many investment institutions to buy the RMB exchange rate at the bottom.
      "Currently, between July 25 and July 26, overseas investment institutions are more enthusiastic about bargain-hunting for the onshore RMB exchange rate." A Hong Kong bank foreign exchange trader analyzed and pointed out. “This has also given many overseas quantitative investment funds that track the inversion of interest rates between China and the United States another theme of buying down the RMB.”

According to the foreign exchange traders of the above-mentioned banks, the current short-selling of RMB by these capitals is not very strong. This is specifically reflected in the fact that the decline in the RMB exchange rate is highly "in line" with the integer increase in the US dollar and the inversion of the interest rate differential between China and the United States, without any obvious deviations or abnormal fluctuations.

   "After all, China's economic fundamentals continue to improve, and overseas capital is still increasing its allocation of domestic RMB government bonds, which has given strong support to the RMB and discouraged overseas speculative capital." A Hong Kong private equity fund manager said bluntly.
      He found that although the domestic and overseas RMB exchange rate differentials have expanded since April, the intensity of overseas speculative capital short-selling the RMB through cross-border exchange spread arbitrage transactions is obviously not as strong as before, and the short-selling positions in the offshore RMB market are also relatively weak. An important reason behind this may be that overseas speculative capital on the one hand believes that the strong dollar may be just a "temporary phenomenon". If the Federal Reserve does not "relax" on interest rate cuts, the U.S. dollar index will still likely correct in the future; on the other hand, note that As China's economic fundamentals remain robust and improving, the odds of winning by short selling the RMB have plummeted.
     "Although the foreign exchange market is currently speculating that there is a certain probability that the Federal Reserve will further raise interest rates, this is currently not enough to drive overseas speculative capital to increase short selling of the RMB." He emphasized.

Fed keeps interest rates unchanged, starts to slow pace of balance sheet reduction in June

After two consecutive days of interest rate meetings, on May 1, local time, the U.S. Federal Reserve announced that it would maintain the target range for the federal funds rate at 5.25% to 5.5% and slow down the pace of balance sheet reduction since June. It also said it would continue to postpone the first interest rate cut due to higher-than-expected inflation data. At a subsequent press conference, when talking about inflation risks, Fed Chairman Powell did not mention the possibility of raising interest rates, but said that policy would remain unchanged if needed.

This is the sixth consecutive meeting since September last year when the Federal Reserve kept interest rates unchanged. In a statement issued that day, the Federal Reserve said that although inflation has eased over the past year, it remains high. In recent months, the Fed has shown a "lack of further progress" toward achieving its 2% inflation target. It would be "inappropriate" for the Fed to lower the target range for the federal funds rate until it has greater confidence that inflation will continue to move toward its long-term goal of 2 percent.
Over the past year, risks to achieving the twin goals of full employment and price stability "have become better balanced," the statement said. This wording has been adjusted from the previous statement that "it is moving toward a better balance."
      In its latest statement, the Federal Reserve decided to continue reducing its holdings of U.S. Treasury securities, agency debt and agency mortgage-backed securities, but decided to slow down the pace of reductions. Specifically, starting in June, the monthly cap on reductions in U.S. Treasury holdings will be lowered to $25 billion, while the cap on reductions in agency debt and agency mortgage-backed securities will remain unchanged at $35 billion. Any principal above this limit is reinvested in U.S. Treasury securities.
      The Fed reiterated in its statement that it will continue to monitor changes in the economic outlook and adjust monetary policy as necessary. Federal Reserve Chairman Jerome Powell said at the press conference that it may be appropriate to delay cutting interest rates due to strong current demand in the U.S. labor market and higher-than-expected inflation. He also emphasized that slowing down the pace of balance sheet reduction is to ensure a more gradual adjustment of the balance sheet, while reducing money market pressure and avoiding financial market turbulence.

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