On the morning of September 25th, the offshore renminbi's spot exchange rate against the US dollar once broke through the 7.0 mark, marking the first time since May 2023. It is noteworthy that on September 18th, the offshore renminbi's spot exchange rate against the US dollar was still at 7.1.
In terms of news, on September 24th, during a press conference held by the State Council Information Office, the Governor of the People's Bank of China (PBOC), Pan Gongsheng, announced a series of significant policies including reserve requirement ratio cuts, interest rate reductions, lowering existing housing loan interest rates, and the creation of new structural monetary policy tools to support the capital market.
Pan Gongsheng emphasized that the PBOC's stance on exchange rate policy is clear and transparent. It adheres to the market's decisive role in exchange rate formation, maintains exchange rate flexibility, and simultaneously strengthens expectations guidance to prevent the formation of unilateral expectations and their self-fulfillment, guarding against the risk of exchange rate over-adjustment and maintaining the basic stability of the renminbi exchange rate at a reasonable and balanced level.
Renminbi exchange rate shifts to appreciation
"Recently, the monetary policies of major economies have been adjusted, and the depreciation pressure on the renminbi exchange rate has significantly eased and shifted to appreciation," Pan Gongsheng stated at the press conference. The adjustment of monetary policies by major economies has significantly eased the depreciation pressure on the renminbi exchange rate. The Federal Reserve's interest rate cut of 50 basis points is the first rate cut after years of the interest rate hike cycle, and the monetary policies of major economies have entered a rate-cutting cycle, with the momentum for the US dollar's appreciation weakening. As the differences in domestic and international monetary policy cycles converge, the external pressure on the basic stability of the renminbi exchange rate has significantly decreased.
According to a report by 21st Century Economic Herald on the 24th, the Federal Reserve's interest rate cut of 50 basis points last week has eased market concerns about a US economic recession. The Goldman Sachs G10 foreign exchange team expects that the US dollar will have a slight rebound in the next three months, and then slow down again from a 6-month and 12-month perspective. Against the backdrop of the Federal Reserve's faster rate cuts, market concerns about a hard landing have decreased, and the overall risk appetite outlook is optimistic.
Regarding the latest trend of the US dollar against the renminbi, Goldman Sachs strategists believe it is more driven by a broad sell-off of the US dollar. "The recent appreciation of the renminbi against the US dollar is mainly influenced by external factors, especially changes in market pricing for the Federal Reserve's rate cut and the US election," the institution said.
ING strategists believe that the US dollar/renminbi has actually fallen to a new low, reflecting both the overdue hedging of US dollar receivables by Chinese exporters and a re-rating of investment theories in China, as well as investors reducing their positions in China.
Uncertainty in the external environment and the trend of the US dollar still exists. Pan Gongsheng stated that, looking at the domestic situation in China, the renminbi exchange rate still has a relatively stable and solid foundation. First, from a macro perspective, the economy's recovery and upward momentum will further consolidate and strengthen. The PBOC's strong monetary policy measures this time will help support the real economy, promote consumer spending, and boost market confidence; second, the balance of payments remains basically stable. The current account surplus to GDP ratio in the first half of the year was 1.1%, which should be considered a relatively reasonable range; third, the PBOC and the State Administration of Foreign Exchange attach great importance to the construction of the foreign exchange market. As the PBOC has repeatedly explained to the market, against the backdrop of two-way floating of the renminbi exchange rate, participants should also view exchange rate fluctuations rationally, enhance the concept of risk neutrality, and not "bet on the direction of the exchange rate" or "bet on one-sided trends". Enterprises should focus on their main business, and financial institutions should adhere to serving the real economy well.Trendy Appreciation Still Needs Fundamental Support
Wang Qing, the Chief Macro Analyst at Orient Gold Honesty, told reporters that for the Chinese yuan exchange rate, it is currently mainly influenced by two factors: First, the trend of the US dollar, which can cause the yuan's exchange rate against the US dollar to appreciate or depreciate passively; second, the trend of domestic macroeconomics, which determines the intrinsic appreciation or depreciation momentum of the yuan.
Wang Qing explained that at the beginning of the Fed's interest rate cut, the US dollar index will face certain downward pressure, which will lead to a passive appreciation of the yuan's exchange rate against the US dollar, and the exchange market sentiment will also be more optimistic in the short term. However, in the medium and long term, the US dollar's interest rate cut does not necessarily lead to a continuous weakening of the US dollar. The reason is that during the monetary easing cycle, the trend of the US dollar will mainly be determined by the comparison of the economic fundamentals between the United States and Europe and Japan, as well as the differences in monetary policy orientation, and the US dollar index still has the possibility of rising.
It is worth noting that Wang Qing said that if the Fed's interest rate cut pace is faster than market expectations, the US dollar index may break below 100, and the yuan's exchange rate against the US dollar will approach the direction of 7.0, and it is not ruled out that it may return to the 6s in the short term.
Domestically, Wang Qing believes that with the gradual emergence of the effects of stable growth policies, as well as the continuous and rapid development of new quality productive forces, the domestic GDP growth rate is expected to maintain around 5.0%, which will provide intrinsic support for the yuan exchange rate. However, he also frankly stated that before the domestic real estate market stabilizes and warms up, the possibility of the yuan's continuous and significant appreciation is also not great.
Many interviewed people also hold similar views. Liu Tao, a senior researcher at Guangkai Chief Industry Research Institute, told reporters that due to the current insufficient strength of China's economic fundamentals and the monetary policy is also in a relatively loose state, the yuan exchange rate may not be able to appear in a unilateral and large-scale strong trend.
Zhou Ji, a macro foreign exchange analyst at Nanhua Futures, said that although overseas factors have created a good appreciation environment for the yuan in the short term, to truly achieve a trend of appreciation of the yuan exchange rate, it still needs the support of the domestic economic fundamentals logic to return.
Wu Chaoming, the vice president of Caixin Research Institute, frankly stated that with the domestic counter-cyclical policy strengthening and striving to achieve the annual economic growth target, the economy is expected to improve on a quarter-to-quarter basis, which will form an important support for the yuan exchange rate. However, there are many external risks and challenges faced domestically, and the recovery of domestic demand has more uncertainty, and the yuan exchange rate may still be mainly bidirectional in the short term.