Positive news has been coming in succession, with the Chinese yuan rapidly "breaking 7" against the US dollar, giving the market a boost. On September 25th, in the early morning of the Asian trading session, the offshore yuan broke through the 7.0 mark against the US dollar for the first time since May last year. As of 17:30 Beijing time, the highest offshore yuan exchange rate touched 6.99515.
The offshore yuan exchange rate has reached a new high since May last year.
The People's Bank of China authorized the China Foreign Exchange Trade Center to announce that on September 25th, the middle rate of the yuan against the US dollar was reported at 7.0202, an increase of 308 basis points, setting a new high since May 22, 2023.
In terms of news, on September 24th, the State Council Information Office held a press conference, where the Governor of the People's Bank of China, Pan Gongsheng, stated that the monetary policies of major economies have been adjusted recently, and the depreciation pressure on the yuan exchange rate has been significantly alleviated, and it has turned to appreciation.
Pan Gongsheng emphasized that the exchange rate is a comparative price relationship between currencies, and its influencing factors are very diverse, such as economic growth, monetary policy, financial markets, geopolitical factors, and sudden risk events, all of which can affect the exchange rate. Looking at the external situation, influenced by the divergence of economic trends among countries, geopolitical changes such as the US election, and fluctuations in international financial markets, the uncertainty of the external environment and the trend of the US dollar still exists. Looking at the domestic situation in China, he stated that the yuan exchange rate still has a relatively stable solid foundation.
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Pan Gongsheng warned that under the background of the two-way floating of the yuan exchange rate, participants should also view exchange rate fluctuations rationally, enhance the concept of risk neutrality, and avoid "betting on the direction of the exchange rate" and "betting on one-way trends". Enterprises should focus on their main business, and financial institutions should adhere to serving the real economy well.
Pan Gongsheng further stated that the People's Bank of China's position on exchange rate policy is clear and transparent. There are several key points: First, adhere to the decisive role of the market in the formation of the exchange rate and maintain exchange rate flexibility. Second, strengthen expectation guidance to prevent the foreign exchange market from forming a one-sided consensus expectation and self-fulfilling, prevent the risk of exchange rate over-adjustment, and maintain the basic stability of the yuan exchange rate at a reasonable and balanced level.
The Federal Reserve's interest rate cut has also led to a weakening of the US dollar and the strengthening of non-US currencies. In the early morning of September 19th Beijing time, the US Federal Reserve announced that the target range for the federal funds rate would be lowered to 4.75% to 5%, that is, a cut of 50 basis points, which is the first interest rate cut by the Federal Reserve since 2020.
On September 12th, the US dollar index showed a significant decline, and it has since fallen by nearly 1.4%, currently hovering around 100.3 points, with the lowest reaching 100.2 points. The market expects that as the Federal Reserve continues to cut interest rates in the fourth quarter, the US dollar index will test the support of the 100-point integer level.
Orient Jincheng's Chief Macro Analyst Wang Qing and Senior Analyst Feng Lin believe that the recent significant rise in the yuan exchange rate against the US dollar is mainly driven by the following factors. First, on September 24th, the central bank announced a cut in interest rates and reserve requirements, and increased policy support for the real estate industry. This effectively boosted market confidence and was the main reason for the sharp rise in the yuan exchange rate that day. Second, the Federal Reserve's significant interest rate cut in September led to a downward trend in the US dollar index, which will also promote a passive appreciation of the yuan against the US dollar. Finally, since July, the continuous appreciation of the yuan against the US dollar has changed market expectations. In August, the scale and exchange rate of bank customer settlement and exchange have been increasing, while the scale and exchange rate of bank customer sales and exchange have significantly decreased. This has formed a "better settlement and exchange balance - yuan appreciation" cycle in the short term, and it is expected that this situation will continue subsequently.The future may continue the characteristic of two-way fluctuations.
The Chinese yuan against the US dollar has overall formed an "inverted L" shape this year, starting at 1 US dollar to 7.12 yuan, and then due to multiple domestic interest rate cuts, the US dollar has generally shown strength. The high point occurred on July 3rd this year, once touching 1 US dollar to 7.3115 yuan. However, as the Federal Reserve's interest rate cut stance became increasingly clear, the US dollar plunged from a high position, showing a clear decline, and the yuan strengthened. On the morning of September 25th, it "broke 7", reaching 1 US dollar to 6.99515 yuan.
A Hong Kong bank foreign exchange dealer revealed to the reporter that the Federal Reserve's interest rate cuts, along with regulatory voices, have shifted the market's view on a strong US dollar. Some overseas hedge funds have reduced their offshore yuan short positions, helping the yuan exchange rate to continue to appreciate both domestically and abroad.
It is worth noting that the yuan exchange rate has repeatedly hit new highs within the year, which has further enhanced the flexibility of China's monetary policy. Pengpeng Network Wealth Financial Planner Zeng Hengwei believes that in fact, since the expectation of the Federal Reserve's interest rate cut has heated up, the yuan has already started to appreciate. Recently, there has been a continuous flow of good news, and the financial support for the real economy has continued to strengthen, with corporate financing costs declining. For the real economy, this is undoubtedly a major piece of good news. Especially for small and micro enterprises with difficult and expensive financing, lower financing costs will help them develop better and thus promote the stable growth of the entire economy, enhancing market confidence in China's economic recovery and helping the yuan to strengthen.
Regarding the subsequent trend of the yuan, Wang Qing said, looking to the future, the current foreign exchange market sentiment is relatively strong, and the pent-up demand for settlement will continue to be released. After the yuan exchange rate "broke 7", there may still be some room for appreciation. In terms of the yuan exchange rate, it is currently mainly affected by two factors: one is the trend of the US dollar, which will cause the yuan exchange rate to the US dollar to appreciate or depreciate passively; the second is the trend of domestic macroeconomics, which determines the intrinsic appreciation or depreciation momentum of the yuan.
Wang Qing analyzed that, overall, at the beginning of the Federal Reserve's interest rate cut, the US dollar index will face certain downward pressure, especially in the context of the European Central Bank's slower interest rate cut pace and the possibility of the Bank of Japan raising interest rates. This will lead to a passive appreciation trend of the yuan against the US dollar, and the foreign exchange market sentiment will also be more optimistic in the short term. However, in the medium and long term, US interest rate cuts do not necessarily lead to a continuous weakening of the US dollar. In the monetary easing cycle, the trend of the US dollar will mainly be determined by factors such as the comparison of the economic fundamentals of the United States with Europe and Japan, and the differences in the policy orientations of the Federal Reserve, the European Central Bank, and the Bank of Japan. Judging from this, the US dollar index has already fallen to a certain extent recently, and the market is currently focusing more on the differences in monetary policy between the Federal Reserve and the European Central Bank and the Bank of Japan. It is possible that the impact of economic fundamentals will rise in the future. This means that the US dollar index will have strong resilience, and it is even possible to turn and rise.
Wang Qing added that domestically, with the effects of this round of stable growth policies becoming apparent and new quality productive forces continuing to develop rapidly, multiple factors will form intrinsic support for the yuan exchange rate. In the short term, the yuan is expected to continue its strong performance since July. However, before the domestic real estate market stabilizes and warms up, the possibility of the yuan continuing to appreciate significantly is also not large. Overall, the next step for the yuan will maintain a pattern of reverse fluctuations with the US dollar, and the possibility of greatly rising or falling with the US dollar trend is very small. This also means that in the future, "maintaining the basic stability of the yuan exchange rate at a reasonable and balanced level" is not to stick to a certain exchange rate point, but to focus on preventing the yuan from rapidly rising or falling with the US dollar trend. This is of great significance for current external risk prevention and control. In other words, whether the yuan against the US dollar can continue to return to the "6" in the future will be mainly determined by the trend of the US dollar index.
Huatai Futures analyst Cai Shaoli said that from a big trend perspective, the core driving force of this round of yuan appreciation is still the weakness of the US dollar, especially against the background of weakening US economic data and increased expectations for US dollar interest rate cuts, the yuan exchange rate is supported. Although the settlement and sale data in August have significantly improved, its correlation cannot be determined, and the medium and long-term trend of the yuan will still be affected by the bidirectional differences in the economic fundamentals of China and the United States. This indicates that after the short-term appreciation of the yuan exchange rate, it may continue to show the characteristic of two-way fluctuations in the future.
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