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To ease the short-term depreciation pressure of the RMB, counter-cyclical regulation is urgent

Source: Securities Times 2023-08-18 A

Yesterday, both the onshore and offshore RMB/USD exchange rates fell below the 7.3 important mark, triggering heated discussions in the market. Since the end of July, the exchange rate of RMB against the US dollar has continued to depreciate, breaking through the 7.2 and 7.3 barriers successively from around 7.13. This can't help but make people curious. The RMB exchange rate still rebounded from the end of June to the end of July. Why did the appreciation trend only last for nearly a month and then turned down? What factors are leading the reversal in the two months of July and August?

For a country’s currency that adopts floating pricing based on market supply and demand, the factors affecting its exchange rate trend are relatively complex, including short-term factors such as emergencies and market sentiment, as well as economic fundamentals, balance of payments, etc. long-term factors. However, the exchange rate of the RMB against the U.S. dollar can experience an "inverted V" trend from rising to falling in less than two months. As a slow variable, medium and long-term factors are obviously unable to undergo significant changes in such a short period of time and affect the exchange rate. Yes, in contrast, short-term factors play an absolutely important role. Among them, the changes in the US dollar index and market sentiment are the most obvious.

Looking back at the trend of the U.S. dollar index since the end of July, it can be found that in the last 20 trading days, it has risen by more than 3%, while the exchange rate of onshore and offshore RMB against the U.S. dollar has fallen by less than 2% during the same period, which shows that despite the strengthening of the U.S. dollar index, the RMB exchange rate has been "dragged" , but some other positive factors supporting the yuan have eased some of the depreciation pressure.

However, in the past 10 trading days, the U.S. dollar index has only increased by about 0.7%, but the exchange rate of RMB against the U.S. dollar has depreciated by 1.5%, and the exchange rate of RMB against the U.S. dollar is accelerating. This is related to the fact that some of the economic and financial data released in July point to the weakening momentum of economic recovery, the speed and strength of counter-cyclical regulation and control policies are not as fast as the market expected, and the impact of risk events in real estate companies and other fields. These will affect market sentiment and confidence. Reflected in the decline in stock exchange resonance.

In the short term, there is still a certain depreciation pressure on the RMB exchange rate. The latest Fed meeting minutes suggest that there is a high probability of continuing to raise interest rates within the year, and the U.S. dollar index still has strong support in the short term. With the addition of domestic interest rate cuts, the interest rate gap between China and the United States hovering at a high level (may further widen) will still be suppressed in the short term The RMB exchange rate keeps the RMB/USD exchange rate in a weak range, but the weak range will be affected by market sentiment and confidence.

Under the current environment, changing market sentiment and confidence is inseparable from policies that respond to market concerns as soon as possible with more than expected strength. The policy move of the People's Bank of China to cut interest rates in a timely manner this week deserves full affirmation. The "China Monetary Policy Implementation Report for the Second Quarter of 2023" released yesterday also proposed to resolutely prevent the risk of exchange rate overshooting. The second plenary meeting of the State Council emphasized "vigorously improving administrative efficiency and providing strong guarantees for the completion of various tasks", "ensuring the completion of annual goals and tasks", "promoting substantive risk reduction in key areas", and looking forward to the urgent need for counter-cyclical regulation and control Sense, increase the "horsepower" to escort the economic recovery.

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