1. Monetary policy also has a significant impact on exchange rates, and the implementation of monetary policy needs to take into account both internal and external balance, hence the need to consider exchange rates as an important factor; 2. The market expects that the Federal Reserve will cut interest rates within the year, with relatively limited internal and external constraints on our country's monetary policy, stabilizing exchange rates will marginally ease the constraints on loose monetary, 3. Several experts expect that reserve requirement ratio cuts are expected to be implemented in the third quarter, releasing 500 billion of liquidity if the cut is at 25 basis points.
The RMB exchange rate against the USD today is 7.0925. In recent times, the RMB exchange rate against the USD has rebounded rapidly, with the RMB exchange rate against the USD unilaterally rising in August. Institutions predict that the RMB will experience wide fluctuations in September. Experts point out that monetary policy also has a significant impact on exchange rates, and that implementing monetary policy requires considering both internal and external balance, therefore, the exchange rate needs to be taken into account as an important factor.
Experts also stated that there is sufficient expectation for a rate cut by the Federal Reserve this year, and there are relatively limited internal and external constraints on our country's monetary policy, which eases the constraints on broad currency. The central bank's latest statement yesterday also indicated that there is still room for a reserve requirement ratio cut. Many experts expect that the reserve requirement ratio will be reduced in the third quarter, and if the reduction is 25bp, it would release 500 billion in liquidity, boost investor confidence, and stabilize the capital market.
Pressure on the RMB exchange rate has eased.
Today, the mid-point of the RMB to USD rate is reported at 7.0925, which is 64 basis points higher than the previous trading day. The previous trading day, the mid-point of the RMB to USD rate was 7.0989. Today, the opening rate of the USD to RMB rate is reported at 7.0860.
In the just-past August, the RMB to USD exchange rate rose unilaterally, showing an overall upward trend within the range of 7.0881 to 7.2481. Among them, onshore RMB to USD rose from 7.2261 to 7.0881, a cumulative increase of 1380 basis points; the mid-point of the RMB to USD rate increased from 7.1346 to 7.1124, a cumulative increase of 222 basis points; offshore RMB to USD rose from 7.2277 to 7.0906, a cumulative increase of 1371 basis points.
The National Economic Research Center of Peking University pointed out that the most important factor currently affecting the RMB trend is the September rate cut by the Federal Reserve. In summary, the main factors influencing the unilateral appreciation of the RMB at present are fluctuations in the USD Index. In September, influenced by expectations of a rate cut by the Federal Reserve, the RMB may experience wide fluctuations. It is expected that the RMB exchange rate in September will fluctuate bidirectionally within the range of 7.03 to 7.20.
"From an external perspective, the United States may implement a rate cut in September, which could alleviate pressure on the RMB exchange rate," said Dong Ximiao, Chief Researcher at Zhaolian.
CITIC Securities Chief Economist Ming Ming told Caixin reporters that there is sufficient expectation for the Fed to start an interest rate cut cycle this year, and the internal and external constraints on China's monetary policy are relatively limited, which eases the constraint on loose monetary policy caused by exchange rate stability. Overall, there is still room for loose monetary policy.
"One of the important goals of monetary policy is to maintain the stability of the currency's value, which not only includes the stability of domestic purchasing power, but also the stability of purchasing power abroad under open economic conditions. This requires exchange rate stability within a reasonable and balanced range," said Lou Feipeng, a researcher at China Postal Savings Bank. In terms of exchange rate, while economic fundamentals play a determining role, monetary policy, especially interest rate changes, also have a significant impact on exchange rates. Therefore, a balance between internal and external equilibrium needs to be considered in the implementation of monetary policy, with exchange rates as an important factor.
China Everbright Bank Researcher Zhou Maohua pointed out that stable RMB exchange rate helps reduce transaction costs and risks for the foreign trade sector, promotes the development of global trade and investment; stable RMB exchange rate also helps boost foreign confidence and promote the inflow of capital trends; it helps prevent imported price fluctuations and stabilize production costs for enterprises. The stability and increased flexibility of the RMB will play the role of an automatic stabilizer for international balance of payments.
A reserve requirement ratio cut may be introduced in the third quarter.
In terms of the internal environment, Dong Ximiao believes that monetary policy is an important part of macroeconomic policy. From the statements of the central bank, a prudent monetary policy should be more precise and effective, comprehensively using various monetary policy tools, further intensify countercyclical adjustments, more effectively boost market confidence and expectations. Currently, China's downward economic pressure is still significant, and there are high expectations for interest rate cuts and reserve requirement ratio cuts. There is both a necessity and space for interest rate cuts and reserve requirement ratio cuts. After the implementation of measures such as rectification of "manual interest rate supplements" and reduction of deposit interest rates takes effect, the cost of bank liabilities has decreased, and there is still the possibility of reducing the loan prime rate (LPR) and promoting a decline in actual loan interest rates in the next step.
Wu Chaoming, Deputy Director of the Institute of Finance and Trust Research, told Caixin reporters that the probability of a reserve requirement ratio cut in the future is still not low. The first reason is to meet the needs of fiscal policy. The second reason is to alleviate the constraints of bank capital and interest rate spreads. In addition, the probability of interest rate cuts is increasing as well. The US Federal Reserve is highly likely to cut interest rates for the first time in September, and the probability of multiple interest rate cuts within the year has increased, opening up space for interest rate cuts in China.
Dong Ximiao believes that in the third quarter, the central bank may implement a comprehensive reserve requirement ratio cut of 0.25-0.50 percentage points; in the fourth quarter, it may lower the policy rate by 10-15 basis points, promote the synchronous decline of the LPR, and help stabilize and lower the cost of social financing.
Ming Ming believes that there is a possibility for liquidity release through a reserve requirement ratio cut in the third quarter, with a cut of possibly 25bp and the release of 500 billion liquidity. The specific timing may be adjusted reasonably in consideration of government bond issuance pace and market fund situation.
"Cutting reserve requirements can boost investor confidence and stabilize capital markets, especially the performance of equity markets. Due to the systematic reduction of risk asset allocation by global investors, coupled with certain pressure on domestic fundamentals, domestic investors have a very low willingness to deploy on the left side and the lack of incremental funds has become a major problem facing the current equity market. Cutting reserve requirements can not only provide liquidity to the market, but also send a strong signal for stable growth, which can help boost confidence and the stock market," Ming Ming said.
Editor/Rocky