Recently, the continued depreciation of the yuan against the dollar has triggered widespread concern in the market.On June 28, the onshore yuan fell below 7.25 against the dollar during the trading session, and the offshore yuan fell to 7.2692 at one point, both hitting new lows since November 2022.During the trading session on June 29, the onshore yuan fell below the 7.25 mark again, while the offshore yuan lost the 7.27 mark at one point.

Looking back to 2022, the RMB has experienced two waves of relatively large depreciation against the US dollar, one from 6.37 in mid-April last year to a rapid adjustment to 6.81 in mid-May, and the other was a sustained adjustment from 6.75 after the MLF rate cut on August 15 last year, until it touched a low of 7.32 in November. Compared with the two waves of depreciation last year, what are the differences in this round of RMB depreciation?

In addition, in the face of the decline in the yuan exchange rate, market speculation that the central bank or reintroduce the "countercyclical factor" to stabilize the exchange rate. Interviewed experts pointed out that, in order to prevent the currency market "herd effect", do not rule out the regulatory layer to reintroduce the "counter-cyclical factor", and even the use of other currency market regulation tools possible. This is not to guard a specific point, but aims to control the speed of depreciation, to avoid market sentiment one-sided, polarization.

Renminbi against the dollar exchange rate broke 7.25 again

Since May, the yuan against the U.S. dollar exchange rate continued to fall, one after another breakthrough 7.00, 7.10 mark, and then in recent days quickly fell below the 7.20, 7.25 mark.

June 26, the yuan against the dollar in the offshore market both lower, the opening that fell below 7.20, and then continued to sink, the day onshore closed at 7.2219, offshore closed at 7.2454. And the next day, onshore and offshore yuan exchange rate rebounded, the plate successively recovered 7.22, 7.21 mark, the final closing onshore at 7.2101, offshore at 7.2239.

However, this rebound momentum did not continue. June 28, the onshore and offshore markets both plunged, the onshore yuan against the dollar exchange rate intraday fell below 7.25, the offshore yuan was close to 7.27, both hit a new low since November 2022, intraday depreciation of nearly 400 basis points. The day onshore yuan against the dollar rate closed at 7.2455, offshore closed at 7.2431.

In the June 29 session, the onshore yuan fell below the 7.25 mark again, while the offshore yuan also lost the 7.26 mark again.

Zhou Maohua, a macro researcher at Everbright Bank's Financial Markets Department, told the Daily Economic News reporter that the factors for the recent depreciation of the RMB exchange rate can be attributed to several aspects:

First, the pace of economic recovery is not satisfactory enough, the market is expected to policy easing;

Second, the hawkish rhetoric of the Federal Reserve, triggering expectations of a stronger dollar have risen;

Third, market volatility has increased, causing some impact on the RMB exchange rate;

Fourth, the seasonality of the dividend purchase of foreign exchange on the market short-term supply and demand disturbances.

Strengthening of the US dollar index in the short term creates passive depreciation pressure on the RMB exchange rate

Previously, the central bank in the first quarter of 2023 China's monetary policy implementation report pointed out that the current external environment has become more complex and severe, the domestic economy is still not strong endogenous momentum, demand is still insufficient.

The reporter noted that in April-May, the national consumer price index (CPI), the industrial producer price index (PPI) are down from the previous year, the manufacturing purchasing managers' index (PMI) is lower than the critical point, and the non-manufacturing business activity index declined.

According to customs statistics, in May this year, China's imports and exports 3.45 trillion yuan, an increase of 0.5%. Among them, exports 1.95 trillion yuan, down 0.8%; imports 1.5 trillion yuan, an increase of 2.3%; trade surplus of 452.33 billion yuan, narrowed by 9.7%.

In this context, the market for policy easing expectations. Right in the middle of June, the operating rates of 7-day reverse repo, Standing Lending Facility (SLF) and Medium-term Lending Facility (MLF) were cut by 10 basis points. Subsequently, June LPR quotes came out, with both 1-year and 5-year+ LPRs cut by 10 basis points.

"After the policy interest rate cut landed in June, other growth-stabilizing policies have not yet been fully introduced, especially after the LPR quotes for 5-year or more were lowered, the market still lacks a clear expectation as to when other measures to stabilize the property market will be rolled out. The resulting difference in expectations of growth-stabilizing policies is a major factor leading to the recent faster depreciation of the RMB." Wang Qing, chief macro analyst of Dongfang Jincheng, told the Daily Economic News reporter that after a sharp rebound on June 16, the RMB weakened again in recent trading days, mainly because the current market depreciation expectations have not been fundamentally reversed.

For the June policy rate cut landing, as well as the resulting monetary policy divergence between China and the United States, Wang Qing said, "can see that after the rate cut, the degree of inversion of the interest rate differential between China and the United States did not appear to further significantly deepen; and review last year's RMB exchange rate trend, it can also be seen that the impact of the central bank's interest rate cut is not large."

In addition, on June 28, local time, Fed Chairman Powell said at the ECB seminar held in Sintra, Portugal, that most policymakers expect two more rate hikes this year and do not rule out the possibility of consecutive rate hikes. This hawkish statement makes the market on the Fed rate hike is expected to lift, coupled with the U.S. government debt ceiling crisis, etc., in the short term, the U.S. dollar index strengthened, the yuan exchange rate to form a passive depreciation pressure.

How does it differ from last year's two rounds of devaluation?

Looking back to 2022, the RMB has experienced two waves of relatively large depreciation against the USD, one from a rapid adjustment from 6.37 in mid-April last year to 6.81 in mid-May, and the other was a sustained adjustment from 6.75 after the MLF interest rate cut on August 15 last year, until it touched a low of 7.32 in November. After that, it began to rebound and closed at 6.9514 on December 30 of that year.

This year, the onshore and offshore yuan against the dollar exchange rate accumulated depreciation of more than 4%, the recent renewed tumble constantly refresh the year's new low. Compared with last year's two waves of depreciation, what are the differences in this round of RMB exchange rate depreciation?

Wang Qing told reporters that, from the driving factors, this round of RMB depreciation and the two rounds of depreciation process in 2022 are not much different, are mainly driven by the economic fundamentals are expected to weaken. The difference is that the 2022 epidemic and the evolution of prevention and control policies determine the economic fundamentals and the direction of the RMB exchange rate; and since April this year, the external demand tends to slow down, the property market again under the influence of the weakening of the domestic economic recovery momentum is weak, has become the main reason for promoting the current round of RMB depreciation.

In addition, from the duration and the magnitude of depreciation, compared with the two rounds of depreciation process in 2022, this round of depreciation process is relatively more gentle; and from the settlement and sale of foreign exchange, cross-border capital flows, the market depreciation of expectations and other data observation, this period of time, the overall operation of the foreign exchange market situation is also more stable. This is so far, the regulatory layer has not yet used the exchange market control tools for a reason.

The reporter noted that, due to the recent large fluctuations in the yuan exchange rate, the market speculation that the central bank may re-introduce the "counter-cyclical factor" to stabilize the exchange rate.

Wang Qing said, taking into account the recent depreciation momentum of the yuan has accelerated, in order to prevent the exchange market "herd effect", do not rule out the regulatory layer to reintroduce the "counter-cyclical factor", and even use other exchange market control tools possible. "It should be noted that this is not to hold a specific point, but aims to control the speed of depreciation, to avoid market sentiment one-sided, polarized."

Zhou Maohua, on the other hand, believes that the recent RMB exchange rate fluctuations, but the overall did not deviate from the reasonable range, the market did not panic, irrational behavior, the RMB exchange rate flexibility has increased significantly. Domestic firmly promote the market-oriented reform of the RMB exchange rate, the central bank will take more anticipatory guidance before the market appears to significantly deviate from the fundamentals, irrational, pro-cyclical or malicious shorting and other behaviors.

How is the RMB exchange rate trend in the second half of the year?

A number of interviewees said that the next RMB exchange rate trend will depend on the impact of economic fundamentals.

Zhou Maohua told reporters that from the internal environment, is still optimistic about the performance of the RMB exchange rate, is expected to continue in the second half of the RMB exchange rate is expected to continue to fluctuate in both directions around the reasonable equilibrium level, mainly due to the recovery of domestic economic activity, the steady recovery of the service industry, the macro-policy is precise and powerful, and the economy is steadily recovering. From the external environment, the tail end of the Fed's interest rate hike, and overseas economic slowdown, etc., favorable RMB trend. In addition, from the point of view of real interest rates, China's interest rates are still higher than those in Europe and the United States.

Wang Qing believes that the current RMB exchange rate is in the stage of depreciation pressure, but in the short term, the possibility of directly breaking through the low point in November last year is unlikely. This is mainly due to two reasons: First, in the depreciation rate is fast stage, in order to prevent the exchange market "herd effect", the regulatory layer may use all kinds of exchange market regulation tools, to curb the momentum of excessive depreciation; Second, after the June interest rate cut, there will be a number of growth stabilization policies and measures will be launched one after another, the policy expectations of the yuan depreciation caused by the difference is expected to be alleviated. Ease.

"We judge that the next yuan against the dollar exchange rate is likely to fluctuate for a period of time above the low point of November last year, that is to say, the possibility of directly breaking through the point of 7.32 is smaller." Wang Qing said, about the future trend of the RMB exchange rate, can focus on the June 16 State Council executive meeting mentioned a number of stabilizing growth policy measures to launch time, and when the momentum of the macroeconomic recovery in the third quarter turned stronger.

In addition, Wang Qing believes that "in the second half of the domestic price level is expected to continue to be in a moderate state of the prospect of the simple weakening of the yuan will not substantially affect the direction of domestic monetary policy. As the world's second-largest economy, China will put monetary policy independence in the first place. If there is a need to further increase countercyclical regulation in the second half of the year, there is room for both interest rate cuts and rate cuts."

At the same time, the current moderate increase in the flexibility of the yuan exchange rate, release the depreciation pressure, but also better play its macroeconomic automatic stabilizer role. More importantly, the second half of the moderate easing of monetary policy, will effectively boost the economic recovery momentum, which is the most effective support for the RMB exchange rate.

Article source: Daily Economic News