Since December 2020, the onshore yuan has peaked at 6.4236, and in four months, US$100,000 has appreciated by about US$14,000.
Despite the recent expansion of the yuan’s decline, the yuan is still performing strongly if compared side-by-side. So far this year, the yuan is currently down about 0.36%, while the U.S. dollar index is up more than 3.2%, the yen is down more than 5.7%, and the Korean won and the euro are down more than 4% and 3.5%, respectively. The Brazilian real fell as much as 9.7%, and the Argentine currency fell 8.4%.
Mid-April will be the next window of observation for domestic monetary policy. Because April and May are traditionally big months for tax payments, as the tax period approaches in mid-April, it is iterated that the supply pressure on interest rate bonds will also rise significantly from April onwards, and the gap in base money will gradually emerge, at which Time how the central bank hedges will become a window to observe whether the tone of the central bank’s monetary policy is fine-tuned. Slight depreciation hits 4-month low
On March 30, data from the China Foreign Exchange Trade Center (CFEC) showed that the mid-price of the yuan against the dollar was 6.5641, down 225 basis points from the previous trading day. On the previous trading day, the RMB/USD mid-rate was at 6.5416, which was also the fifth consecutive trading day of depreciation since last week and a new low since December 2020.
In the spot market, the yuan opened sharply lower against the dollar, reaching 6.5796, a new low since December 1, 2020, before falling into a shocking trend. In the offshore market, the yuan once reached 6.5836 against the dollar, also hitting a new low since Dec. 1, 2020.
Clearly, the RMB exchange rate has fallen a bit more in recent times, but if you compare it side-by-side, the RMB is still performing on the stronger side. So far this year, the yuan has fallen by about 0.36%, while the dollar index has moved up by more than 3.2%, the yen has fallen by more than 5.7%, and the Korean won and the euro have fallen by more than 4% and 3.5%, respectively. The Brazilian real fell by 9.7% and the Argentine currency fell by 8.4%.
In particular, since March, the dollar has continued to strengthen, with the dollar index rising from a low of less than 90 to 93, a new high since November 2020, and some “vulnerable” emerging markets such as Turkey, Brazil and Russia decided to raise interest rates. Brazil raised its benchmark interest rate by 75bp to 2.75% on March 17, 2021; Russia raised its benchmark interest rate by 25bp to 4.25% on March 22; Turkey has been raising interest rates since September 2020, and as of March 19, the benchmark interest rate has been raised from 8.25% to 19%.
Compared to these emerging economies facing the pressure of “having” to raise interest rates, China’s RMB exchange rate has performed very strongly globally, with the market’s willingness to settle foreign Exchange Rates generally high, which has become an important factor supporting the stability of the exchange rate. Data previously released by the State Administration of Foreign Affairs showed that the net foreign exchange settlement from December last year to February this year, including spot, forward and options, was close to $170 billion, and from the relative performance of the yuan and the dollar in March, it can be expected that the net settlement in March will not be too low. More emerging economies will “have to” raise interest rates
Although the RMB exchange rate does not fall much in the short term, the market may still be unprepared for the potential risks of a stronger dollar and needs to pay close attention. According to the U.S. Commodity Futures Trading Commission (CFTC) data, speculators held a net short position in the U.S. dollar in recent weeks plunged to $10.78 billion, the lowest level since June last year, many institutions turned long dollar, speculative long positions have recently shifted to net long.
On the contrary, the euro and especially the yen speculative positions have fallen sharply, and even turned net short; at the same time, after deducting the exchange rate hedging costs of the U.S.-German and U.S.-Japanese spreads are at a new high since 2014, so the U.S. debt is significantly more attractive to European and Japanese investors.
“The dollar may still have some support in the short term.” Looking ahead, the above support factors may be difficult to be reversed in the short term from the fundamental, policy and trading levels, according to CICC’s Wang Hanfeng team. This background does not rule out that there is still support in the short term, and the 94~95 before the US Epidemic escalated again in November last year can be used as a short-term reference.
This report argues that the strengthening of the dollar index is the result of a combination of the recent round of fiscal stimulus and progress in controlling the epidemic, the widening of the rift between US and other countries’ growth expectations, the increased attractiveness of spreads after higher interest rates, and the expected tightening of monetary policy. Going forward, the above factors supporting the dollar’s strength may be difficult to reverse in the near term. Fundamentally, the effect of the new round of fiscal stimulus in the U.S. is expected to be more concentrated in the next month or two, reflected in the income of the population and consumer spending; vaccination is expected to further accelerate, Biden said in his latest press conference last week that he will plan to achieve the goal of 200 million doses of vaccination in his 100 days in office (end of April), which may make the “herd immunization ” to come sooner, which in turn will drive production back to work and offline service consumption repair.
Clearly, in the current environment, exposures that are favorable to dollar appreciation should be considered as much as possible, and emerging market exposures need to be compressed, with more emerging economies “having to” raise interest rates in the future and eventually falling into a quagmire of capital outflows, currency depreciation, and stagnant growth.
According to EPFR data, since March 2020, the market value of foreign capital holdings in Turkish stocks and bonds has soared rapidly, once reaching a historical peak, and after Turkey started to raise interest rates in September 2020, there have been signs of foreign capital outflows, but from the market value level, there is still more room for outflows; similar to Turkey, foreign capital has continued to flow into the Russian stock and bond market since March 2020, and has now exceeded the pre-epidemic level The next window of observation for domestic monetary policy will be mid-April.
As a major manufacturing country, mainland China is less affected by overseas markets due to the central bank’s rich monetary policy control mechanism and strong ability to quell Inflation, coupled with a complete industrial chain. Therefore, analysts are expecting that in the short term, interest rate hikes in emerging markets will not be the core factor affecting China’s monetary policy turn.
However, with the deletion of the phrase “no sharp turn” in the press release of the regular monetary policy meeting in the first quarter, there has been a lot of discussion recently on whether the tone of the central bank’s monetary policy will change. The latest central bank banker questionnaire also reflected that the credit market tends to be in short supply, with the overall loan demand index at 77.5% during the reporting period, up 5.9 percentage points from the previous quarter and 11.6 percentage points from the same period last year. The possibility of the real economy’s financing costs entering an upward trend is extremely high. During the reporting period, the monetary policy Perception index was 51.0%, 7.2 percentage points lower than the previous quarter and 21.8 percentage points lower than the same period of the previous year.
According to Qu Qing, chief economist at Jianghai Securities, the current funding surface is in the central bank’s consensual range, and the need for the central bank to significantly ease or tighten monetary policy in the short term is not strong. From the current situation, whether it is the DR007 rate that remains stable around 2.2%, or the issuance rate of 3.05% or so of the first-class national stock certificates of deposit, or the yield of 10-year treasury bonds at 3.2% or so, all are in the central bank’s agreeable range.
The next window of observation for monetary policy will be mid-April. April and May are the traditional tax payment months, and as the tax period approaches in mid-April, the supply pressure on interest rate bonds will rise significantly from April, and the gap in base money will gradually appear. Before mid-April, the quarter-end fiscal deposits are put in, plus the demand for funds at the beginning of the season is significantly weaker, and the liquidity environment is expected to remain loose overall, which is still a relatively friendly time window for the bond market.
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