Due to changes in the external environment, the Chinese yuan exchange rate has changed its previous trend of being easy to appreciate and difficult to depreciate over the past two months.
In the early morning of October 16th, Asia-Pacific time, the onshore Chinese yuan exchange rate against the US dollar was reported at 7.1177, with the lowest point during the trading session reaching 7.125, setting a new low since September 10th. On the same day, the Chinese yuan exchange rate against the US dollar in the middle rate was reported at 7.1191, also setting a new low since September 12th.
In fact, the Chinese yuan exchange rate had already significantly weakened the day before. As of 19:30 Beijing time on October 15th, the offshore Chinese yuan exchange rate against the US dollar broke through 7.12, touching 7.1343 at one point during the day, with a daily decline exceeding 300 points, marking one of the largest single-day declines of the year. On the same day, the onshore Chinese yuan exchange rate against the US dollar closed with a drop of more than 350 points.
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Behind this, the volatility in the Chinese yuan exchange rate market is also increasing. Currently, the one-month implied volatility of the offshore Chinese yuan against the US dollar is approaching its highest level since December 2022. Since 2011, the gap between this volatility and the two-week indicator has expanded the most, indicating that traders expect the US presidential election on November 5th to cause significant market fluctuations.
"The market is returning to 2018," said one trader, "The market is betting that the Republican candidate will win in the US presidential election."
This coincides with the views of several analysts. ANZ Bank's senior China strategist, Xing Zhaopeng, believes that the outlook for the US presidential election and China's economic stimulus policies are affecting the Chinese yuan exchange rate market. The future trend of the Chinese yuan exchange rate will highly depend on the outcome of the US presidential election, which is currently unclear.
CICC's latest forecast suggests that the Chinese yuan exchange rate against the US dollar may fluctuate between 7.00 and 7.12 in the future. Currently, the pressure of the US dollar index and US dollar interest rates may still be present, and the optimism of China's third-quarter and September economic data may be limited. Without updated policy expectations for support, the Chinese yuan exchange rate may still face some depreciation pressure.
Trump trade heats up.Mitsubishi UFJ Bank (China) Co., Ltd. Chief Financial Market Analyst Sun Wu believes that as the U.S. presidential election approaches, the market begins to trade on geopolitical factors, which exacerbates fluctuations in the RMB exchange rate market. Currently, the market is assessing which candidate from the Democratic and Republican parties will win and the impact of their trade policies on the Chinese market.
So far, Democratic presidential candidate Harris has not indicated any significant changes in trade policy. However, according to Xinhua News Agency, Republican presidential candidate Trump stated that if he is re-elected president, he will increase tariffs on Chinese goods imported to the U.S. to 60%, or even higher.
On October 15, in a media interview, Trump again expressed his advocacy for raising U.S. tariffs.
Pepperstone Group Ltd. Research Director Weston (Chris Weston) wrote in a report released on October 14: "Trump's support rate in opinion polls, especially in six key swing states, has risen sufficiently to raise market concerns about tariffs and trade conflicts. We have observed significant fluctuations in the foreign exchange options market, which are reflected in currency pairs such as the RMB against the U.S. dollar, the Mexican peso against the U.S. dollar, and the euro against the U.S. dollar."
"In the early stages of policy implementation, tariff policies tend to benefit the U.S. dollar and bearish on emerging market currencies, with the RMB also under pressure," said Matt Weller, Global Research Director at Gain Capital Group.
Previously, Harris's poll support rate had significantly exceeded Trump's, but Harris's leading momentum has slowed down recently. In the key swing state of Pennsylvania, Harris's advantage has almost disappeared.
In fact, the Chinese exchange rate market's nervousness about Trump's possible election as president is not without precedent. During his last presidential term, due to his tariff policy, the RMB exchange rate against the U.S. dollar fell to its lowest point in ten years in August 2019.
In addition, Weller said that the market's cooling expectations for the Federal Reserve to cut interest rates is also an important factor driving the RMB exchange rate under pressure recently. The reason is that the strong U.S. job market and rising inflation have led the market to bet that the Federal Reserve will not aggressively cut interest rates.
In September, the U.S. non-farm employment increased by 254,000, far exceeding the expected 150,000. At the same time, in September, the U.S. Consumer Price Index (CPI) rose by 2.4% year-on-year, higher than the market's expected 2.3%.
Against this backdrop, Goldman Sachs estimates that the probability of a U.S. economic recession in the next 12 months has been reduced to 15%.Goldman Sachs Raises China's Economic Forecast
Looking ahead, Weller believes that the renminbi exchange rate is likely to fluctuate widely within the range of 7.0-7.3 in the future.
UBS has adjusted its forecast for the renminbi against the US dollar at the end of 2024 to 6.95, up from 7.10. However, the bank also warns that if market expectations for Fed rate cuts, policy support from the Chinese government, and macroeconomic data performance fluctuate, the renminbi may still face depreciation pressure and experience short-term volatility.
The current account and capital account are the two major factors affecting the exchange rate market. In terms of export situation, Xing Zhaopeng believes that due to the weakening semiconductor cycle, it is expected that China's export situation has already passed its peak.
Customs data shows that in September, China's import and export volume was 3.75 trillion yuan, a year-on-year increase of 0.7%, with the growth rate falling by 4.1 percentage points compared to the previous month. Among them, exports and imports increased by 1.6% and decreased by 0.5% respectively, both slowing down compared to the previous month.
Lu Dalian, director of the Statistical Analysis Department of the General Administration of Customs, stated that the slowdown in export growth in September is a normal short-term data fluctuation. Preliminary analysis suggests that it was mainly affected by some short-term occasional factors, such as the high base of export scale last September; two typhoons landing in the Yangtze River Delta region in September this year in succession, causing the ship schedule to be postponed, and exports were delayed; the global shipping was not smooth for a period of time, and the shortage of containers caused enterprises to adjust their delivery and logistics rhythm.
From the perspective of the capital account, Xing Zhaopeng believes that the foreign capital flowing into the Chinese market in the future will be generally balanced, and the scale of inflow and outflow of bonds and stocks will not be large. "In terms of bonds, the yields of major international bonds fluctuate narrowly, and it is expected that the pace of US interest rate cuts will slow down, and the main government bond indices are expected to change little. In terms of stocks, as the index retraces, foreign capital will slow down the inflow into the Chinese stock market."
Goldman Sachs believes that for the future sources of foreign capital flowing into the Chinese market, the amount of investment by Middle Eastern capital in emerging markets is increasing, which will to some extent fill the gap left by other investors. In addition, the bank also believes that there is still further potential for the Chinese stock market to rise in the future, with MSCI and the CSI 300 having 14% and 15% upward space respectively in the next 12 months.
On October 15, the latest quarterly holding data of Northbound funds was released. As of the end of the third quarter, Northbound funds held a total of 132.312 billion shares of A-share companies, with a holding market value of 2.41 trillion yuan. Compared to the Northbound funds' daily data before the suspension on August 16, it increased by nearly 7.3 billion shares and 500 billion yuan.
For the future trend of the renminbi exchange rate, a more macro perspective is to observe the trend of the fundamentals of China and the United States and the interest rate differential between China and the United States.From a fundamental perspective, on October 14th, Goldman Sachs released a report, raising China's 2024 real Gross Domestic Product (GDP) forecast to 4.9%.
CICC believes that since September 24th, the Politburo meeting has discussed the economic situation in September for the first time in ten years, sending a clear signal of stable growth. Various Chinese government departments have successively held press conferences to announce a package of incremental policies to boost market confidence, stabilize growth, and control inflation. The reserve requirement ratio (RRR) cut and interest rate cuts have been implemented, and it is expected that fiscal potential will be tapped within the year to supplement financial resources, a new round of large-scale hidden debt replacement, and a future central government deficit increase is anticipated.
From the perspective of interest rate differentials, Sun Wu stated that although the market expects the China-US interest rate differential to gradually narrow, the possibility of the Federal Reserve significantly cutting interest rates in the short term is low, which means that the China-US interest rate differential will remain large. Analyzing from the perspective of potential returns, in the short term, US dollar assets have a stronger appeal compared to Chinese yuan assets.
Regarding the future Chinese monetary policy, Xing Zhaopeng believes that it is currently entering an observation period, and it is expected that the People's Bank of China will have another reserve requirement ratio cut before the end of the year, with the next interest rate cut expected in January 2025.