Source: Wind

The US dollar is falling, while the Chinese yuan and gold are rising.

On September 16, the US dollar index continued its downward trend as the Federal Reserve's interest rate cut approached. On Monday, the US dollar index opened lower and continued to fall, experiencing multiple sharp declines and reaching a new low in nearly a week, closing at 100.663. It is not far from the lowest point of the year at 100.511. As of around 5 am Beijing time on September 17, Tuesday's opening saw a rebound, but then retreated again after reaching a high point. The US dollar is expected to continue its steady decline along the trend this week and is likely to fall below the lowest point of the year, reaching a new low for over a year.

As the US dollar weakens, gold strengthens, and the seesaw effect between the two is evident. On September 16, the international gold price once again reached a new historical high as expected. The COMEX gold price briefly surged to $2617.4, and London gold reached as high as $2589.68, just a step away from breaking the $2600 mark. The cumulative gains for both varieties so far this year are as high as 25.98% and 25.19% respectively, making them attractive investment options.

As for the Chinese yuan, during the Mid-Autumn Festival holiday, the onshore RMB market was closed, but the offshore RMB continued to decline against the US dollar. On Monday, the offshore RMB broke through 7.1, not far from the 7.07084 record high of over a year. By the close, the offshore RMB continued to appreciate, reaching 7.09708. On Tuesday, the offshore RMB's rise continued. Once the Federal Reserve's interest rate cut is implemented and the US dollar continues to weaken, the RMB is expected to continue its upward trend. There will be significant changes in global asset allocation in the future.

Foreign capital has continued to increase its holdings of RMB assets.

According to data released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in late August, the international payment value share of the Chinese yuan rose to 4.74% in July this year, reaching a new record high. Market participants believe that as the interest rate differential between China and the US narrows, the advantage of RMB assets over USD assets in terms of return on investment is gradually becoming apparent. This not only applies to the bond market but also involves other RMB-denominated financial assets. The higher return on investment has attracted a large amount of international capital inflow into the Chinese market, further supporting the value of the RMB.

It is reported that the main bond spread trading is the sum of the potential appreciation return of the RMB in the future and the short-term bond holding return rate perceived by overseas capital, which is expected to exceed the yield of the corresponding U.S. bonds, leading foreign capital to increase holdings of short-term treasury bonds and interbank deposits in the domestic market.

Yin Ruizhe, an analyst at Guotou Securities, pointed out in the report that in this wave of bond spread trading, the main arbitrage investment target of overseas capital is the interbank deposits. Since November last year, the scale of interbank deposits bought by overseas capital has reached about 800 billion yuan, with an average month-end purchase amount of 88.9 billion yuan. By the end of July, the scale of interbank deposits held by overseas capital reached 1,090.9 billion yuan, accounting for about 6.16%. In addition, Zhao Zhixuan, an analyst at Bloomberg Asia, also stated that overseas investors have significantly increased their buying power for interbank deposits this year, with their holdings rising to 6.15% at the end of July, reaching the highest level since 2015, slightly lower than the holdings of overseas investors in Chinese government bonds (7.16%).

The further appreciation of the RMB and its impact

Song Xuetao, chief macro researcher at Tianfeng Securities Research Institute, stated that there is a possibility for further appreciation of the RMB exchange rate at present.

The main driving factor for the appreciation of the RMB lies in the weakening of the U.S. dollar. The current trend of U.S. dollar depreciation has not changed, and the expected interest rate cuts by the Federal Reserve and the volatility of the U.S. stock market may exacerbate the weakness of the U.S. dollar. The adjustment of U.S. stocks in the second quarter may just be the beginning, and disagreements have arisen between Silicon Valley and Wall Street, which may intensify conflicts and cause even greater volatility in the next financial reporting season. Meanwhile, the political uncertainties are also posing a challenge to the U.S. dollar index. The pressure on the U.S. dollar index may bring the possibility of RMB appreciation.

The appreciation of the RMB is also related to the internal environment. The market-oriented reform measures of factors help reduce the long-term risks in the economic transformation process and alleviate the pressure of the RMB exchange rate in the short term. In addition, the huge difference between China's trade surplus and its net foreign exchange sales reflects the phenomenon of "hoarding foreign exchange by the public," which is also a potential driving force for the future appreciation of the RMB.

China's exports have been strong this year, and the trade surplus has reached a historic high, but the high trade surplus has not been reflected in foreign exchange reserves. This indicates that trade companies, in pursuit of the appreciation of the U.S. dollar and higher interest rates on U.S. dollar deposits, have not settled foreign exchange in a timely manner. Macquarie Group estimates that since 2022, Chinese exporters and multinational companies have accumulated over 500 billion U.S. dollars in U.S. dollar assets. Once the expectation of RMB appreciation strengthens and the exchange rate reaches key levels such as 7, companies may exchange U.S. dollars for RMB to avoid exchange losses, thereby accelerating the appreciation of the RMB. The RMB exchange rate is expected to break through 7, or even reach the common fluctuation range of 6.9.

Looking at the impact generated by the expectation of appreciation, in terms of monetary policy, the central bank may continue to cut interest rates after RMB appreciation. Previously, the central bank has already lowered the OMO (Open Market Operations), LPR (Loan Prime Rate), and MLF (Medium-term Lending Facility) interest rates, sending a clear signal to the market. At the same time, the central bank may control the yield curve through various means, laying the groundwork for a smooth interest rate cut.

Against the backdrop of loose monetary policy, fiscal policy will also become more proactive. In the past, there has been a certain degree of asynchrony between monetary policy and fiscal policy, partly due to the inability of the exchange rate to withstand depreciation pressure. When the depreciation pressure on the exchange rate disappears, the central bank can purchase government bonds to increase market liquidity, and the fiscal policy can also accelerate the pace of bond issuance and policy implementation.

A more proactive fiscal policy means not only speeding up the use of committed funds but also increasing investment in the upgrading of manufacturing industry and new infrastructure. At the same time, an active fiscal policy can also be used to fill the fiscal gap through central leveraging or quasi-fiscal tools, providing support for economic development.

Editor/Rocky