Summary: The RMB exchange rate against the US dollar has returned to the level seen in late January this year.
Futures Daily reported on August 28: On August 27, the RMB continued to show strong performance. On that day, the central parity rate of the RMB against the US dollar was reported at 6.8903, up 176 basis points from the previous trading day. Both offshore and onshore RMB exchange rates against the US dollar regained the 6.88 mark during intraday trading. At present, the RMB exchange rate against the US dollar has returned to the level of late January this year.
Considering that the weakening of the US dollar is the main reason for the recent rapid appreciation of the RMB, and there is a possibility of a rebound in the US dollar in the future, some analysts said that although they are bullish on the RMB trend in the medium and long term, they need to be alert to adjustment risks brought by a US dollar rebound in the short term.
In the view of Dai Chaosheng, macro foreign exchange analyst at Nanhua Futures, the logic of the RMB trend this year is completely different from last year. "If last year the mutual tariffs between China and the US were the most critical factor affecting the RMB exchange rate trend, then this year, especially since the outbreak of COVID-19, the recovery of the domestic economy and the impact of the US dollar index on the RMB have gradually increased," Dai said. "According to statistics, since May, whether offshore or onshore RMB, the correlation coefficient with the US dollar index is close to 90%." In addition, compared with other countries, China's epidemic control has been more orderly. With the steady progress of resumption of work and production in various industries, the domestic economy has recovered well, which has attracted a large inflow of foreign capital into the domestic market. Market insiders said that under such circumstances, although the RMB has occasionally adjusted since May, overall it has always been in a strong operating state.
"We previously saw the RMB gain some catch-up appreciation due to temporarily optimistic expectations about Sino-US relations, but there is still uncertainty over whether Sino-US tensions will further escalate in the future. In view of this, we hold a neutral-to-bearish attitude toward the RMB in the short term, but we remain confident in the RMB in the medium and long term," Dai said.
According to the reporter, the reason for his judgment is mainly that the market generally believes that the US dollar has a certain possibility of rebounding in the short term.
A macro researcher at Galaxy Futures Research Institute told reporters that earlier, because the EU reached a recovery economic agreement of up to 750 billion euros in July, market expectations for the European and US economies diverged, the euro exchange rate against the US dollar strengthened, and the US dollar weakened under this background. But considering that the US dollar is still the world's most important settlement and reserve currency, and the US economy has a certain resilience, market expectations for the European and US economies are likely to reverse. "At least we can see that the yield on 10-year US Treasury bonds is still positive, while the interest rate level of European public bonds is negative," the researcher said.
"Recently, the number of newly confirmed cases in the US has dropped significantly from the peak period. At present, the number of daily new confirmed cases is around 40,000, close to the level in April and May. Under such circumstances, the US government is considering restarting the economy again. In addition, with the approaching US presidential election, market uncertainty has increased, giving the US dollar index safe-haven support." But Dai also said that the slowdown or even rebound of the US dollar's decline is likely to be temporary. In recent years, although the linkage between the stock market and the foreign exchange market has strengthened, the exchange rate is not the main factor affecting the stock market. If the RMB only weakens slightly in the short term, the impact on the stock market will not be too great.
It is worth mentioning that the sustained and steady recovery of the domestic economy remains the "ballast stone" for the RMB. Against the backdrop of global economic recession due to the COVID-19 pandemic, most economists predict that China will be the only major economy to achieve positive economic growth this year, and the attractiveness of the RMB and its related asset allocation is undoubtedly relatively high. "That is precisely why, although the northbound capital flows into A-shares have been volatile recently, foreign capital will continue to allocate RMB assets in the future," Dai said.