Source: Finance Association
Author: Wang Hong

Today, the central price of the RMB against the US dollar rose by 24 basis points in a single day, and the central price of the RMB showed an upward trend for four consecutive trading days. In fact, against the backdrop of a weakening US dollar index, the RMB appreciated more than 2.5% against the US dollar in November to around 7.13 at the end of the month. Furthermore, the Federal Reserve has suspended interest rate hikes three times in a row recently, and the market is expecting interest rate cuts.

Catalyzed by a series of favorable factors, economists have also raised their forecasts for the exchange rate of the RMB against the US dollar. UBS's chief Chinese economist raised the forecast value of RMB against the US dollar at the end of 2023 to around 7.1, and raised the RMB exchange rate against the US dollar to 7.0 at the end of 2024. Many industry insiders believe that it is more likely that USD/RMB will break 7.0 next year.

The Federal Reserve may cut interest rates next year. Recently, the RMB exchange rate has been rising all the way

On December 18, the People's Bank of China authorized the China Foreign Exchange Trading Center to announce that on December 18, 2023, the median RMB exchange rate in the interbank foreign exchange market was: 1 US dollar to RMB 7.0933. The median price for the previous trading day was 7.0957 yuan, an increase of 24 basis points in a single day. The central price of RMB showed an upward trend for four consecutive trading days.

The onshore and offshore RMB exchange rates fluctuated around 7.12. On December 18, the opening price of the onshore RMB was 7.1250, more than 200 basis points lower than the closing price of the previous trading day; the opening price of the offshore RMB was 7.1295, up slightly from the closing price of the previous trading day.

As of 14:00 on December 18, the onshore RMB price was 7.1284; the offshore RMB price was 7.1322.

Wang Tao, head of Asian economic research at UBS and chief Chinese economist, pointed out that against the backdrop of the weakening US dollar index, the RMB appreciated by more than 2.5% against the US dollar in November to around 7.13 at the end of the month.

Zhou Maohua, a macro researcher at Everbright Bank's Financial Markets Department, also pointed out that recently the Fed has hinted at the end of the interest rate hike cycle and is gradually transitioning to a path of interest rate cuts. The dovish interpretation of the market is that the US dollar has fallen, and non-US currencies such as the RMB have rebounded.

Recently, the Federal Reserve suspended interest rate hikes at its December meeting, announcing that the target range of the federal funds rate will remain unchanged at 5.25%-5.5%. Since the interest rate meeting in late September this year, the Federal Reserve has suspended interest rate hikes three times in a row. Federal Reserve Chairman Powell said that interest rates are already at and close to peaking. Outsiders generally believe that Fed officials have begun discussions on the prospects of interest rate cuts, and that this round of interest rate hikes has come to an end.

The Societe Generale macro team said that the dovish rhetoric in the Fed's December interest rate talks has prolonged the weak market in the US dollar index, risk appetite continues to remain high, and the RMB exchange rate has interrupted the weak market to regain its appreciation trend in the last two weeks. On December 15, the central price of the US dollar against the RMB was below 7.10. In addition, the November foreign exchange settlement data showed that the settlement exchange rate declined and the accumulation of unsettled transactions continued. We maintain the view that there is still room for the RMB exchange rate to appreciate before the Spring Festival.

Zhou Maohua also said that positive factors in the RMB are accumulating. Recent financial and economic data show that China's domestic demand continues to repair the trend, and the momentum for fundamental recovery is further stabilizing; domestic macro-risk regions have subsided, foreign trade resilience, basic balance of payments, favorable macroeconomic policy environment, and low stock market valuations have benefited market risk appetite. The RMB exchange rate is supported by solid fundamentals. At the same time, with the end of the Fed's interest rate hike and the weakening economic outlook, etc., the upward space for the US dollar is constrained by the continued accumulation of positive factors in the RMB exchange rate, and we continue to be optimistic about the trend of the RMB.

Will the RMB exchange rate break “7” next year?

The renminbi has been appreciating recently, and economists have also raised their forecasts for the exchange rate of the renminbi against the US dollar. Wang Tao adjusted the forecast value of RMB against the US dollar at the end of 2023 from 7.3 to around 7.1; the previous exchange rate of RMB against the US dollar at the end of 2024 was raised from 7.15 to 7.0.

Wang Tao said that in view of the weakening of the US dollar, the forecast for the exchange rate of the RMB against the US dollar was raised. In response to the latest trend of the US dollar, we adjusted the forecast for the RMB against the US dollar at the end of 2023 to around 7.1. The spread between China and the US dollar, US Treasury yields, and fluctuations in the US dollar index may still bring about phased fluctuations in the RMB exchange rate.

Wang Tao also said that since the central bank may further relax monetary policy, the RMB may depreciate again against the US dollar in the first quarter of next year. China's economic growth is expected to stabilize, and the central bank will not cut interest rates after next spring. At the same time, it is expected that growth in the US economy will slow in 2024, and the Federal Reserve will begin cutting interest rates. Interest spreads on Chinese and US bonds are expected to narrow, the US dollar is expected to weaken, and the restoration of confidence in the Chinese economy will jointly promote a slight appreciation of the RMB against the US dollar. Therefore, we expect the RMB exchange rate to be 7.0 against the US dollar at the end of 2024.

Wang Yang, a foreign exchange strategy expert and general manager of Beijing Huijin Tianlu Risk Management Technology Co., Ltd., said that in the short term, the USD/RMB is likely to move in the direction of 7.0 because the exchange rate falls below 7.12, which supports key technical support, and at the same time before the end of the year is a period where traditional settlement is concentrated. The possibility that the USD/RMB will break 7.0 next year is still quite high.

Regarding the forecast of a fall below “7.0,” Wang Yang said that this is mainly because the Fed will begin a cycle of cutting interest rates next year. “However, the dollar's decline may not be as strong as it was at the beginning of a cycle of interest rate hikes. Because its main rival currency, the Eurozone, is also likely to begin a cycle of interest rate cuts. There is even an opinion now that the European Central Bank may cut interest rates before the Federal Reserve, so the euro will at least not be much stronger than the US dollar. This will limit the decline in the US dollar index. At the same time, the central bank of China is likely to continue to ease monetary policy, so the RMB will not be much stronger. Therefore, looking ahead to next year, there will definitely be a broad range of market fluctuations, but overall, the USD/RMB may be dominated by broad fluctuations or volatile declines.”

Looking ahead to 2024, Dongwu Macro has three main basic judgments on the RMB: moderate appreciation throughout the year; according to the normal pace, depreciation pressure in the first half of the year will be greater, but this may not be in line with policy demands; in terms of overall rhythm, it shows the characteristics of “high at the beginning and end of the year, low in the middle,” and may rise above 7 in stages.

editor/tolk