After the Chinese New Year on the yellow calendar, the economic outlook for China and the U.S. reversed relatively, the U.S. bond yield jumped, the U.S. dollar rebounded, the spread between Chinese and U.S. bonds narrowed and the RMB rally weakened. According to BNP Paribas’ head of foreign exchange and local market strategy, Ji Tianhe predicts that the RMB will fall to 6.8 against the USD during this year.
The yuan surged more than 8% against the dollar in the second half of 2020, hitting 6.4245 in January this year, a new high since June 2018. However, as U.S. bond yield rates jumped and the dollar rallied, the yuan began to give back its previous gains, with the onshore yuan falling 1.28% against the dollar in March and once falling to the weak side of 6.57 in early April.
Bloomberg reported on April 8 that the yuan’s movement since the beginning of the year has been quite similar to the trajectory of the same period in 2018, and the market is beginning to be wary of pressure for further yuan weakness, although the current macro environment is not quite the same as it was three years ago, but the market is all facing two factors that are hard to ignore, namely narrowing US-China spreads and the risk of escalating friction between the US and China.
Ji Tianhe, head of foreign exchange and local market strategy at BNP Paribas, said, “The current and 2018 exchange rate trends are very similar, mainly because of the relative reversal in the outlook for the U.S. and China economies, which is also reflected in the narrowing of the U.S.-China spread.”
For Ji Tianhe, China’s economic growth peak has passed in 2018, while the U.S. economy is still continuing to grow and the trade war has exacerbated the divergence between the U.S. and China.
Ji Tianhe expects the yuan to fall to 6.8 against the dollar during the year.
One of the drivers that supported the rise in the yuan against the dollar last year came from foreign inflows, with the 10-year US-China Treasury spread touching more than 250 basis points by the end of 2020, leaving considerable room for arbitrage for foreign investors. However, the US-China bond spread has continued to narrow after reaching record highs, having touched about 145 basis points in late March and now closing more than 150 basis points lower. The market expects that the 10-year U.S. bond yield will rise to 2%.
Ming Ming, an analyst at CITIC Securities, said U.S. bond rates rose a lot in March and some overseas investors switched to U.S. bonds. He expects that the spread between China and the U.S. may continue to narrow at the end of the second quarter, and foreign inflows may fluctuate in the coming months.
Bloomberg reports that the scenario is quite similar to 2018, when the U.S.-China spread also narrowed all the way from about 150 basis points at the beginning of the year to only about 30 basis points by November. The convergence in spreads reflects relative changes in monetary policy, economic growth and price expectations. As a result, foreign institutions reduced their holdings of Chinese government bonds by about 16.51 billion yuan in March this year, ending 24 consecutive months of increased holdings.
U.S. ISM data showed record growth in the service sector in March, with both the orders and business activity indexes reaching record highs; 916,000 new non-farm payrolls were added in March, the most in seven months, and the unemployment rate fell to 6%. With the recent rapid push for vaccinations, expectations of an accelerated recovery in the U.S. economy have increased. Jamie Dimon, chief executive of JPMorgan Chase, said the U.S. economic recovery is expected to continue for at least two years.
Scotiabank strategist Gao Qi believes that regardless of the next market focus on the U.S. economic recovery or the prospect of higher U.S. inflation, U.S. bond rates will likely increase, and the U.S. dollar index will continue to rise to around 95, and the yuan will also weaken.
Recent Comments