The Great Yuan Rally! Inflection point coming?

The yuan exchange rate is rapidly recovering "lost ground".

As of the evening of 15 November, the domestic onshore market RMB against the U.S. dollar touched 7.2427, compared with the closing price of the previous trading day rose 465 basis points, the plate once hit the highest value since mid-August 7.2326.

The yuan hovered at 7.2521 against the dollar in the offshore market, having risen by more than 600 basis points at one point in the past two trading days.        

In the industry's view, this is mainly thanks to the 14 November U.S. October CPI data fell back beyond expectations, further dousing Wall Street's expectations that the Federal Reserve may raise interest rates further.

Dollar Dives, Yuan Rallies

Recently, according to the U.S. Department of Labour data, in October, the U.S. Consumer Price Index rose 3.2% year-on-year, slower than September's 3.7%, lower than market expectations.

Not only that, the U.S. CPI was flat in October from a year earlier, also indicating that the upward momentum of U.S. inflation is slowing. In the five months to October, the U.S. core CPI was 2.8%, significantly lower than the 5.1% in the first five months of the year.        

Boosted by inflation data, U.S. stocks and bonds both soared. EST 14, U.S. bond yields collective double-digit plunge. 10-year U.S. bond yields fell to 4.4%, the largest one-day drop since March.

At the same time, the Federal Reserve interest rate hike will end, driven by the dollar diving, the yuan exchange rate to open the counterattack. 15 evening, the yuan plate once rose more than 600 points, spot volume enlarged to more than 30 billion U.S. dollars.

By the end of the day, the onshore yuan closed at 7.2481 against the U.S. dollar, a nearly three-month high. The offshore yuan closed at 7.2553 against the dollar.        

In response, Sun Wu, chief financial markets analyst at Bank of Mitsubishi UFJ Ltd, said the inflation data cooled off beyond expectations, meaning the US interest rate hiking cycle may be over.

Brendan McKenna, emerging market strategist at Wells Fargo Bank, believes that the next few months time, Asian currencies may perform better than other regions.

The reason for this is, on the one hand, due to the Asian countries export environment is improving, so that these countries are expected to resume growth in foreign trade surplus.

On the other hand, the Asian countries are still leading the world's economic growth, so that the relevant currency exchange rate appreciation space to further expand.

Why the Renminbi Exchange Rate is Firming

It is worth noting that the sharp rebound in the yuan exchange rate, not only thanks to the decline in the dollar index, the U.S. and China's interest rate differential inversion narrowed significantly.

China's economic fundamentals continue to improve and capital return to emerging markets also play a key role.        

Earlier, a Hong Kong bank foreign exchange trader said, since November, the U.S. and China interest rate gap continued to narrow, so that the depreciation of the yuan continued to weaken the pressure, some important foreign exchange indicators have been reflected in the latest changes in the situation of the yuan market, the short and long game.

He believes that behind this phenomenon is more and more overseas quantitative investment funds due to the continued narrowing of the gap between the U.S. and China to reduce the short position in the yuan.

At present, the U.S. Pioneer, Pimco, BlackRock and other large investment institutions are in the bottom of the U.S. bonds, and more and more Wall Street investment institutions believe that the U.S. bond yields have peaked and fell.

In addition to the U.S. and China interest rate differentials continue to narrow, the capital back to emerging markets is also expected to help the yuan exchange rate to continue to rise firmly another key factor.        

With more and more European and American investment institutions that the Federal Reserve interest rate hike cycle has come to an end, the global capital back to emerging markets wave has come, the yuan and other Asian emerging market currencies will become the biggest beneficiaries.

After all, the fundamentals of economic growth in Asian countries is relatively more favourable, enhancing the security of the local currency and the appreciation of space.

In contrast, Brazil, Chile and other Latin American countries central banks are continuing to cut interest rates, so that the financial market to invest in Latin American currencies to maintain a cautious attitude.

This means that invariably prompted more funds flow to the yuan and other Asian currencies, further pushing up the valuation of the latter's exchange rate.        

In this regard, New York Mellon Investment Management Company, head of Asian macro investment strategy Aninda Mitra believes that Asian currencies are expected to stage a rebound market there are many factors.

Including Asian currencies have enough exchange rate flexibility, economic fundamentals are relatively good, part of the Asian countries short-term debt situation has improved.

From the Chinese side, with the policy continues to increase, China's economy is gradually showing signs of stabilisation and warming.        

Recently, according to the latest data from China's National Bureau of Statistics (NBS), the value-added of industry above designated size grew by 4.6% year-on-year in October, a six-month high. Total retail sales of consumer goods grew 7.6%, a five-month high.

Subsequently, the IMF upgraded China's economic forecast to 5.4% and 4.6% for 2023 and 2024. The reason was strong consumer spending and trillion dollar national debt boots on the ground.

Goldman Sachs, on the other hand, raised its 2024 forecast for China's growth to 4.8 per cent. And in Flash Hui's view, investment will be the most important factor to pull China's economic growth in 2024.

Firstly, the Chinese government has already introduced policies related to the safeguarded housing and urban village renovation, which will stabilise the property market.

Secondly, on the policy front, in 2024, China will have a broad deficit rate equivalent to 11 per cent of GDP, a value comparable to that of 2023.        

Going forward, the central government will make up for the lack of local fiscal support, and central finance will remain at a more accommodative level.

And monetary policy will be a means to support fiscal policy, with the People's Bank of China (PBOC) or the possibility of three rate cuts and one interest rate cut in 2024.

Looking ahead to the late trend of the RMB exchange rate, CITIC Securities chief economist Ming Ming believes that with the domestic economy stabilising and picking up, while the central bank continues to flexibly use the foreign exchange market control tools, the value of the RMB currency is expected to stabilise and pick up.

In addition, Wang Youxin, senior researcher at the Bank of China Research Institute, said that next year, China's economic recovery momentum will be further strengthened, for the RMB exchange rate support role will be strengthened.        

The U.S. economy in the rapid interest rate hikes under the negative impact will be further gathered, downward pressure will be revealed in more areas, the Fed rate hike cycle is coming to an end, the external constraints on the yuan will weaken.

On balance, the RMB exchange rate is expected to stabilise and recover next year.