This week, the yuan continued its surge, reaching new highs against the U.S. dollar in both onshore and offshore markets. On December 15, the exchange rate of offshore RMB against the U.S. dollar rose above 7.10 for the first time in half a year, representing a notable increase of more than 200 points in a single day, with a maximum of 7.0975 and a cumulative rise of more than 500 points throughout the week. At the same time, the China Foreign Exchange Trading Center reported a central parity rate of 7.0957 against the U.S. dollar, appreciating to the highest level since June 5, 2023. Looking at the long-term cycle, the offshore RMB against the U.S. dollar has risen by more than 2,000 points with a cumulative appreciation rate of more than 2.8% since early November.
The continued rise of the yuan is attributed to various factors, including a series of positive economic data from China, such as a year-on-year increase of 10.1% in total retail sales of consumer goods in November. Additionally, the Federal Open Market Committee (FOMC) in the U.S. decision to keep the federal funds rate unchanged at 5.25%-5.5% for the third consecutive time, signifying a dovish shift in expectations and discussions of potential interest rate cuts had further impacted the market. However, Williams, the President of the Federal Reserve Bank of New York, poured cold water on this expectation, indicating that there are currently no discussions on cutting interest rates and signaling potential further tightening of policy by the Fed.
In response to these developments, Wang Qing, chief macroeconomic analyst of Oriental Jincheng, stated that the RMB’s rapid appreciation can be primarily attributed to the December Federal Reserve interest rate meeting, as well as the recent improvement in Sino-US relations and the stabilization of the domestic macro-economy. Looking ahead, Wang Qing anticipated that the RMB could continue to appreciate against the U.S. dollar in the short term and may enter a stable range below 7.1. However, the real estate industry’s recovery trend would determine whether the RMB would continue to shift into an appreciation channel in 2024.
Although the RMB’s appreciation is expected to continue in the near term, some economists warn that ongoing efforts in domestic policies and changes in northbound funds would also impact the stabilization of the RMB exchange rate. As such, the global market should carefully monitor these developments to understand the future movement of the yuan against the U.S. dollar.
In addition to the Chinese media, Japanese news outlet “Nihon Keizai Shimbun” also reported on the RMB’s appreciation, attributing it to the U.S.’s decision to stop raising interest rates and the narrowing of the interest rate gap between the two countries. Notably, the yield gap between the 10-year Treasury bonds in the U.S. and China has significantly reduced, compelling investors to reevaluate their preferences. For China, concerns about capital outflows are receding amid these changing dynamics.
The latest surge of the yuan in the foreign exchange markets has sparked interest and concern among experts, economists, and investors, prompting many to closely monitor the RMB’s performance in the coming months. As global economic landscapes continue to evolve, the implications of the yuan’s appreciation will undoubtedly have a ripple effect across international financial markets.