2400 points in 4 days! What is the driving force behind the rapid rise of the RMB exchange rate? Will it continue to appreciate?


Recently, the RMB exchange rate against the US dollar has rebounded sharply, showing a strong trend. As of 18:30 on November 15, the RMB/USD exchange rate in the onshore market (CNY) and the RMB/USD exchange rate in the offshore market (CNH) were hovering around 7.0346 and 7.0337 respectively, with the cumulative maximum increase of more than 2400 basis points in the past 4 trading days.
What is driving the continued strength of the renminbi?
In the opinion of many industry insiders, the reason why the RMB exchange rate has risen so much is not only the market sentiment boosted by the optimized quarantine measures and the continuous decline of the US dollar index, the sharp rebound of the Japanese yen has eliminated the concerns of investment institutions about the depreciation risk of Asian export-oriented currencies, the continuous large inflow of northbound funds into the A-share market, the wide narrowing of the interest rate difference between China and the US, and the return of global capital to emerging markets. These are the "hidden forces" that have fueled the surge in the RMB exchange rate.
Asia's export-led currency devaluation warning 'removed'
A currency trader at a Hong Kong bank noted that the renminbi had risen significantly more than the dollar had fallen over the past four trading days.
The most important factor, he argues, is the sharp rally in the yen against the dollar of about 5 per cent over the past four trading days, which has largely dispelled concerns among global investors about the risk of Asian export currencies falling. That has been followed by a growing number of global investors unwinding short positions in the renminbi, yen and won.
"This week, there has been little discussion in the FX market about the risk of depreciation of Asian export currencies, instead there is a growing perception among investors that these currencies may be undervalued." "Said the Hong Kong bank currency trader. Compared with Japan and South Korea, which still face a trade deficit, China still maintains a relatively high foreign trade economy and trade surplus, which makes the bottom of the RMB exchange rate rebound stronger momentum.
Northbound funds continue to pour into the A-share market
It is worth noting that the RMB exchange rate has been climbing in recent days. Another important reason is that under the resonance of the prominent value depression effect of A-shares and the sound development of China's economic fundamentals, northbound funds continue to flow into the A-share market in A large scale, driving the demand for RMB and the rising exchange rate valuation.
In the past three trading days, northbound funds saw average daily net inflows of more than 8 billion yuan for the first time since December 2021, with cumulative net inflows reaching about 40 billion yuan, according to Datayes.
"This has also attracted more and more overseas capital to join the camp of buying the yuan. At present, there is a high positive correlation between RMB exchange rate and northbound capital inflows. As long as northbound funds keep hunting down A-share assets, more overseas capital will continue to add long renminbi positions." "Says one Hong Kong private-equity head.
Global capital is returning to emerging markets
At present, when the RMB exchange rate to recover the "7" round mark, is attracting attention from the financial market. For several Wall Street hedge fund managers, the renminbi's return to the round 7 mark will take a big "boost" -- a sustained return of global capital to emerging markets.
"Whether global capital returns to emerging markets on a large scale, especially after the pace of future Fed rate hikes slows down, will greatly influence the final exchange rate valuations of emerging market currencies such as the renminbi." The Wall Street hedge fund manager was blunt.
Emerging markets around the world saw net Flows of $9.2bn in October, the second largest so far this year, according to the latest monthly Capital Flows Tracker from the Institute of International Finance published on November 8.
The Wall Street hedge fund manager noted that as global capital continues to return to emerging markets, China remains an important asset allocation and could provide new support for the yuan.
The interest rate gap between China and the US has narrowed broadly
In addition, according to the Wall Street hedge fund manager, a number of Wall Street hedge funds this week have been upgrading the value of the yuan. The reason is that the slowing pace of future interest rate hike by the Federal Reserve has significantly reduced the US bond yield, which has led to a sharp narrowing of the inverted interest rate spread between China and the US, and imperceptibility of the RMB exchange rate has been improved.
The data showed that the spread -- the difference between 10-year Chinese and US bond yields -- had narrowed to 100 basis points by 18:00 on November 15.
What is the future trend of RMB exchange rate?
When assessing the medium - and long-term trend of the RMB exchange rate, we should still focus on economic fundamentals. A stable economy leads to financial stability, and a strong economy leads to a strong currency. The fundamental factors that determine the trend of exchange rate are their own macro fundamentals and market foundation. It is the consensus of all parties that the Chinese economy is resilient and remains on a sound trajectory in the long run.
At present, China has a sound balance of payments structure, a reasonable size of current account surplus, and RMB assets have long-term investment value. In particular, China's economy has continued to recover in the recent years, with prices basically stable and trade surplus remaining high against the backdrop of high global inflation. With the effect of macro policies, the basic economic disk will be more solid. We have the confidence and ability to keep the RMB exchange rate basically stable at a reasonable and balanced level.
Zhou Maohua, macro researcher of financial market department of Everbright Bank, believes that the RMB is expected to fluctuate in two directions near the equilibrium level for some time to come. After all, the sound fundamentals of the Chinese economy provide a solid foundation for the basic stability of the RMB exchange rate. With the steady recovery of the Chinese economy, continued prudent monetary policy, orderly cross-border capital flows, and basic balance of international payments, the RMB exchange rate is becoming more resilient and flexible.
How do companies deal with currency fluctuations?
In recent years, market players have become more rational and mature. The exchange rate leverage adjustment of "buying low and selling high" has played its normal role. Enterprises have significantly increased their awareness of exchange rate risk-aversion, which has reduced the impact of exchange rate fluctuations to some extent. But there are also a small number of enterprises follow the trend of "speculation", financial institutions illegal operations and other phenomena.
Enterprises must view the exchange rate rationally. The point position of the exchange rate is uncertain and two-way fluctuation is normal. Do not bet on the unilateral appreciation or depreciation of the RMB exchange rate.
In recent years, there is no one-to-one correspondence between the bilateral exchange rate of RMB against US dollar and the US dollar index, and there have been cases where the US dollar has appreciated and the RMB has become stronger.
In the foreign exchange market, supply and demand always play a decisive role and the foreign exchange market is capable of balancing itself. For market players, instead of blindly guessing the exchange rate fluctuations, they should actively adapt to the new normal of two-way exchange rate fluctuations, establish a sense of risk neutrality, establish financial discipline, properly manage currency mismatch, and properly manage exchange rate exposure with appropriate financial instruments, so as to better avoid business risks.

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