The Chinese yuan's exchange rate against the US dollar "broke 7" in the early morning, giving the market a boost.
On September 25th, during the early Asian trading session, the offshore yuan recovered the 7.0 mark against the US dollar for the first time since May last year. The highest offshore yuan exchange rate touched 6.99515. The market believes that as the Federal Reserve continues to cut interest rates in the future, the dollar will weaken, and the yuan still has room for appreciation.
The People's Bank of China authorized the China Foreign Exchange Trade Center to announce that on September 25th, the midpoint rate of the yuan against the US dollar was reported at 7.0202, up by 308 basis points, setting a new high since May 22, 2023. The midpoint rate of the previous trading day was 7.0510, the onshore yuan closed at 7.0385 at 16:30, and the night session closed at 7.0318.
The State Council Information Office held a press conference, where the Governor of the People's Bank of China, Pan Gongsheng, stated that the monetary policies of major economies have been adjusted recently, so the depreciation pressure on the yuan exchange rate has been significantly eased, and it has turned to appreciation.
Pan Gongsheng said that the exchange rate is a complex issue, a comparative price relationship between currencies, and its influencing factors are very diverse. For example, economic growth, monetary policy, financial markets, geopolitical events, sudden risk events, etc., all of these can affect the exchange rate. Looking at the external situation, due to the divergence of economic trends in various countries and geopolitical changes such as the US election, the impact of fluctuations in the international financial market, the uncertainty regarding the external environment and the trend of the dollar still exists. Looking at the domestic situation in China, the yuan exchange rate still has a relatively solid and stable foundation.
Pan Gongsheng said that the People's Bank of China's position on exchange rate policy is clear and transparent. There are several key points: First, adhere to the market's decisive role in exchange rate formation and maintain exchange rate flexibility. Second, strengthen expectation guidance to prevent the foreign exchange market from forming a one-sided consensus expectation and self-fulfilling, guard against the risk of exchange rate over-adjustment, and maintain the basic stability of the yuan exchange rate at a reasonable and balanced level.
Hua Tai Futures analyst Cai Shaoli said that from a broader trend perspective, the core driving force behind this round of yuan appreciation is still the weakness of the US dollar, especially against the backdrop of weakening US economic data and increased expectations for a decline in US dollar interest rates, which supports the yuan exchange rate. Although there was a significant improvement in the August settlement and exchange data, its correlation cannot be determined, and the medium and long-term trend of the yuan will still be influenced by the differences in the fundamentals of the Chinese and US economies. This indicates that after a short-term appreciation, the yuan exchange rate may continue to show characteristics of two-way fluctuations in the future. Fundamentally speaking: 1) The economic expectation gap is favorable for the yuan: the July CPI shows that US inflation has slowed but is still higher than the target, strengthening the expectation of interest rate cuts. Coupled with poor performance in the manufacturing PMI, and stable expectations for the Chinese economy, the expectation gap may support the yuan; 2) The China-US interest rate difference is favorable for the yuan: the recent unexpected 50 basis point interest rate cut in the US has further intensified the difference in interest rate trends between the two countries, which is favorable for the yuan; 3) Trade policy uncertainty is neutral: short-term rush exports and external demand resilience support exports within the year, but the risk of trade in the long term is increasing.
Orient Jincheng Chief Macro Analyst Wang Qing and Senior Analyst Feng Lin believe that the recent significant increase in the yuan's exchange rate against the US dollar is mainly driven by the following factors: First, on September 24th, the central bank announced a reduction in interest rates and reserve requirements, and increased policy support for the real estate industry. This effectively boosted market confidence and was the main reason for the significant increase in the yuan exchange rate that day. Second, the Federal Reserve's significant interest rate cut in September led to a downward trend in the US dollar index, which also promoted a passive appreciation of the yuan against the US dollar. Finally, since July, the yuan has continued to appreciate against the US dollar, changing market expectations. In August, the scale and settlement rate of banks' settlement and exchange on behalf of customers increased, while the scale and exchange rate of banks' settlement and sale on behalf of customers significantly decreased. This formed a "settlement and exchange balance improvement - yuan appreciation" cycle in the short term, and it is expected that this situation will intensify in September.
Looking ahead, the current foreign exchange market sentiment is relatively bullish, and the pent-up demand for settlement and exchange will further be released. After the yuan exchange rate goes up and "breaks 7", there may still be some room for appreciation.Currently, the US Dollar Index has also shown a significant decline, with the latest index hovering around 100.3 points, indicating further downward pressure.