RMB Soars! Will It Break 7 This Year?

The Federal Reserve announced an interest rate cut, causing the Chinese yuan to soar.

From 00:00 on September 19th to 15:30 on the 20th, both onshore and offshore yuan's spot exchange rate against the US dollar gained more than a hundred basis points, reaching the highest points of 7.0425 and 7.0378 respectively.

Why did the yuan surge?

Will it break through 7 within the year?

01 Yuan Gains Appreciation Momentum One of the impacts of the Federal Reserve's rate cut on China is the yuan exchange rate.

"The yuan is expected to accelerate its recovery appreciation," said Lian Ping, Dean and Chief Economist of the Guangkai Chief Industry Research Institute.

After the Federal Reserve's rate cut, the inverted interest rate spread between Chinese and US Treasuries is expected to narrow gradually, thus promoting the yuan's recovery appreciation.

However, due to reasons such as China's monetary policy also being in a relatively loose state, the yuan exchange rate is also unlikely to show a unilateral and significant strengthening trend in the short term.

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Pang Ming, Chief Economist of JLL Greater China, also believes that as the Federal Reserve begins its rate cut pace and the expectation of multiple rate cuts heats up, it is expected that developed economies will follow the United States to start a monetary policy adjustment cycle, the strong dollar situation is expected to be reversed, and the China-US interest rate spread is expected to narrow.

The yuan's potential to maintain basic stability at a reasonable and balanced level is stronger.

In addition to the interest rate spread, there are more factors.

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank, said that the impact of the Federal Reserve's rate cut on China's economy is relatively positive.

The Federal Reserve's rate cut, the decline in the yield of US dollar assets, coupled with China's long-term economic development prospects and the attractiveness of the current valuation of yuan assets, is expected to attract global capital inflows, which is beneficial for domestic financial assets and economic development.

At the same time, the Federal Reserve's rate cut also expands the domestic loose policy space and boosts market confidence in the short and medium-term economic recovery.

"With the steady recovery of the domestic economy, the inflow of overseas funds, the resilience of foreign trade and the balance of international payments, the foundation for the stability of the yuan exchange rate is more solid," said Zhou Maohua.

Lian Ping also mentioned that the flow of global funds may become more diversified and dispersed, and the US market is no longer "the only one", but some emerging market countries need to pay attention to the risks brought by the frequent inflow and outflow of short-term cross-border capital.

As for whether the euro, pound, yen and other non-US currencies can continue to strengthen, it depends on the changes in the interest rate spread between the relevant countries and regions and the United States, as well as whether their economic fundamentals are stronger than those of the United States.

02 Can it break through 7 within the year?

CITIC Securities research report predicts that in the future, the concentration of export enterprises' settlement may increase short-term exchange rate fluctuations.

In the short term, the yuan exchange rate may face fluctuations, and it is not ruled out that it may approach 7.0, but the probability of a trend breakthrough of 7.0 within the year is low.

First, although the Federal Reserve's rate cut this time is large, the subsequent path given is flexible and robust.

Second, in the short term, the domestic economy still has a problem of insufficient effective demand.

Third, the People's Bank of China wants to maintain exchange rate stability, and too fast appreciation and too fast depreciation may both have certain risks.

Reviewing the past three rounds of yuan exchange rate appreciation cycles, it can be found that there were significant declines in the US dollar index and obvious improvements in the domestic economic fundamentals, providing a reference background for the current exchange rate trend.

Looking back at the trends of various assets in the past six rounds of rate cuts by the Federal Reserve since 1984, Wen Bin, Chief Economist of China Minsheng Bank, said that from the entire rate cut cycle of the Federal Reserve, the trend of the yuan exchange rate does not show obvious regularity.

Recently, the expectation of the Federal Reserve's rate cut has been strengthened, the China-US interest rate spread has narrowed, and the yen carry trade has been reversed, and the willingness of enterprises to settle has been strengthened, leading to a significant appreciation of the yuan.

After the "boot" of the Federal Reserve's rate cut lands, the pressure of yuan depreciation will be further reduced.

It is expected that most of the time within the year, the yuan exchange rate against the US dollar will fluctuate within the range of 7 to 7.2.

Wang Qing, Chief Macro Analyst of Orient Gold & Credit, analyzed that after the Federal Reserve's rate cut, the impact on the yuan exchange rate is mainly reflected through the trend of the US dollar, which mainly depends on the next rate cut rhythm.

If the Federal Reserve's rate cut rhythm is fast and exceeds market expectations, the US dollar index may break through 100, and the yuan exchange rate against the US dollar will move towards the direction of 7.0, and it is not ruled out that it may return to the 6s in the short term.

On the contrary, if the rate cut rhythm is slow, the fluctuation of the US dollar index is limited, and the yuan exchange rate against the US dollar will remain basically stable.