RMB Exchange Rate Surges: How Long Will It Last?
Experts weigh in on the factors driving the RMB's appreciation against the US dollar and its future outlook.
- Danielle Popov
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As the new day dawns, all eyes are on the RMB exchange rate, which has seen a significant upward surge in recent weeks. After breaking through multiple key levels, the exchange rate of the RMB against the US dollar has settled into a slight fluctuation at an equilibrium level.
On August 6, 2024, the People’s Bank of China authorized the China Foreign Exchange Trading Center to announce the middle price of the RMB in the interbank foreign exchange market. The rate was set at 1 US dollar to RMB 7.1318, marking an increase of 27 basis points in a single day, up from the previous trading report of 7.1345. This marks the second consecutive trading day where the RMB has shown an appreciation trend against the US dollar.
Li Liuyang, a foreign exchange research expert at China International Capital Corporation (CICC), attributes the strengthening of the RMB since July to favorable changes in the external environment. One of the primary factors influencing this trend is the market’s anticipation of the US Federal Reserve’s first interest rate cut, expected in September.
The anticipated rate cut is likely to lead to a decline in US bond yields and a weakening of the US dollar. This, in turn, is expected to boost the value of non-US currencies, including the RMB. Additionally, the narrowing yield spread between Chinese and US bonds offers further support to the RMB exchange rate from multiple dimensions.
Zhong Zhengsheng, Chief Economist at Ping An Securities, highlighted three key macroeconomic factors underpinning the sharp rise in the RMB exchange rate. First, the decline in the US dollar index has created a more favorable environment for the RMB. Second, China’s policies aimed at stabilizing economic growth have bolstered market confidence, strengthening the RMB’s foundation.
Finally, China’s trade surplus, which reached a record high of $99 billion in June, has provided a solid basis for the stability of the RMB exchange rate. The trade surplus, particularly in goods, remains a crucial component of China’s balance of payments, contributing to the currency’s resilience.
From the perspective of the China-US yield spread, an essential factor influencing the RMB’s trend, the spread has shown signs of narrowing after peaking in late April. As of last weekend, the spread of ten-year treasury bonds between China and the United States was -1.67%, down from -2.01% previously, indicating a significant reduction.
Zhou Maohua, a macro researcher in the Financial Market Department of Everbright Bank, notes that China’s economy has been recovering steadily, with prices showing a moderate upward trend. This development is expected to limit the downward pressure on market interest rates.
Meanwhile, as the US economy and inflation slow down, the Federal Reserve is anticipated to enter an interest rate cut cycle, further narrowing the China-US yield spread. Zhou suggests that if the US job market deteriorates beyond expectations, it could prompt the Federal Reserve to accelerate the pace of interest rate cuts, thereby reducing the impact of the spread on the RMB exchange rate.
Despite uncertainties in the overseas political and economic environment, Zhou remains optimistic about the RMB’s prospects, citing China’s resilient foreign trade, balanced payments, and increased attractiveness of RMB assets as positive factors.
He predicts that the RMB exchange rate will maintain a stable and slightly upward trend, remaining stable compared to major international currencies.
Looking ahead, Huatai Futures foresees continued volatility pressure on the RMB exchange rate in the short term. While policy countercyclical factors may offer some support, the exchange rate’s volatility is expected to increase amid the complex global economic environment. Donghai Securities also points to Japan’s interest rate hike and the Federal Reserve’s anticipated rate cuts as potential drivers of further US dollar weakening in the short term. This, in turn, may continue to strengthen the RMB, reduce exchange rate constraints, and open up more room for domestic monetary policy.
As the global economic landscape remains uncertain, the RMB’s recent strength could face challenges, but the outlook for the currency remains cautiously optimistic for the remainder of the year.
