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——The global currency enters the comparison mode
After entering the second half of April, the exchange rate of RMB against the US dollar experienced a rapid depreciation process. Calculated at the spot exchange rate, the depreciation reached 3.3% in the last 10 trading days of April, which not only ended the appreciation process since the second half of 2020, And wiped out the appreciation gains of the past five quarters. However, the author believes that the medium-to-long-term trend of the RMB has not changed. The two-week “diving” of the exchange rate is just a small “wave” in the process of the RMB exchange rate. The process of RMB appreciation has not yet ended. After the market confidence, with the gradual formation of Shanghai’s “unblocking”, the RMB exchange rate will return to the balance zone (6.3-6.4).
1. Panorama of RMB “diving”: benchmark depreciation, overall stability
For the RMB exchange rate, the market is most concerned about the exchange rate of RMB against the US dollar. The reason why the RMB/USD exchange rate has become the “benchmark” exchange rate is that one is habit, and the other is the importance of the U.S. dollar; the U.S. dollar is the most important international currency in the global monetary system, whether it is in the field of trade, investment and reserves, no matter which one is used. According to the calculation of indicators, the proportion of the US dollar is around 70%. Therefore, changes in the exchange rate of RMB against the US dollar naturally affect the “nerve” of the market. However, the market panorama of the change in the RMB exchange rate this time is that, apart from a sharp depreciation against the US dollar, the RMB has been relatively stable against other currencies. The exchange rate movements of the currencies were – 1.0% against the euro, 0.4% against the British pound and 1.9% against the Japanese yen.
From the map of changes in the global foreign exchange market, it is clear that the sharp depreciation of the RMB against the US dollar occurred against the background of the appreciation of the US dollar. In terms of time course, the strength of the dollar has already started as early as the second half of 2021. Clearly, expectations of a reversal in Fed policy are the basis for the dollar to enter a strong course. After the second half of 2021, the market began to brew the Fed’s “taper” and interest rate hike expectations; with the gradual rise of inflation in Europe and the United States, the market expectations of the reversal of Western monetary policy have gradually strengthened, although the entire 2021 process Western monetary authorities are doing their best. To eliminate such expectations in the market, it has been continuously expressed that inflation is temporary and not sustainable, and other official judgments.
Therefore, the strengthening process of the US dollar has already started, and its basis is the withdrawal trend of Western monetary policy. Why is the US dollar thriving under the expectation that the loose monetary policy of the West will be withdrawn as a whole? As far as the six major central banks in the West are concerned, in fact, the United States is not the first to raise interest rates. The United Kingdom started the process of raising interest rates as early as December 2021. However, the exchange rate of the pound against the US dollar remains weak. The inherent understanding in the international currency market – there is a tradition among Western central banks to follow the actions of the Federal Reserve, and the market believes that the global economy has not yet come out of the shadow of the 2008 crisis, and the potential growth rate is still low. Still strong. Most importantly, the hegemony of the US dollar in the international monetary field remains unshakable.
2.The appreciation of the US dollar accelerates, why did the RMB give up resistance
After the outbreak of the Russian-Ukrainian war, due to the influence of geopolitical factors, the US dollar became more and more powerful, which was reflected in the exchange rate market, and the appreciation of the US dollar against non-US currencies accelerated. Judging from the change in the exchange rate of the U.S. dollar against the currencies of major non-U.S. countries, the time of the Russian-Ukrainian war is obviously the demarcation point for the accelerated appreciation of the U.S. dollar. From January to April 2022, the monthly exchange rate changes in each month are (%): Japanese yen, 0, 0.1, 5.8, 6.7; EUR, 0.9, 0, 0.8, 5.7; GBP, 0.7, 0, 2.3, 4.8. The strengthening of the dollar is obviously conducive to the current tightening of monetary policy in the United States to fight domestic inflation – the capital inflow attracted by the strong dollar is obviously conducive to maintaining the stability of the capital market, but it will not have a direct impact on the aggregate demand of the real sector. expansion. Therefore, there are many market views that the United States welcomes the evolution of the Russian-Ukrainian conflict into a hot war, because it is in the economic interests of the United States! Regardless of the motivation behind it, after the outbreak of the Russian-Ukrainian war, the U.S. dollar has indeed experienced a process of accelerated appreciation.
Before April 18, the yuan had been stable. Although the U.S. dollar has been strong since the second half of 2021, the appreciation process of the RMB started a year earlier than that of the U.S. dollar. When the U.S. dollar started the appreciation process in the second half of 2021, the appreciation process of the RMB has already started for more than a year. . From July 2021 to March 2022, the international currency market showed a trend of strengthening the currencies of China and the United States. After 2022, the strength of the U.S. dollar has become more and more obvious, but the RMB still maintains a steady upward trend, so that the market once believed that the RMB has become a safe-haven currency (see FT Chinese website “Renminbi Strength: Safe-haven or International”. change?”). At that time, the market generally believed that even though the Fed’s policy started the process of raising interest rates, the trend of the world‘s economic center of gravity turning to China remained unchanged, and the general direction of RMB appreciation under internationalization remained unchanged.
At the end of February 2022, the RMB/USD exchange rate was close to 6.30. Although it rebounded slightly in March, it immediately entered a balanced operation area. After mid-March, the RMB/USD exchange rate continued to run smoothly in a narrow range of (6.35, 6.40) for January. There was more than that until April 18, when the RMB against the US dollar exchange rate compensated for the fall or dived into mode. Judging from the time point and related processes during the period, the impact of the epidemic on China’s economy is an important reason for the sudden stall of the RMB/USD exchange rate. On March 28, Shanghai closed the city. After April, the economic impact of Shanghai’s closure gradually emerged, and the market’s worries about the impact on the economy gradually increased. In addition, the economic data for the first quarter, which started well, was weaker than expected. The market’s economic prospects for China The expectations of the renminbi against the US dollar have turned, and the stable process of the exchange rate of the RMB against the US dollar has been broken.
3. The global foreign exchange market has entered the stage of winning the election, and the RMB exchange rate will rebound soon
Exchange rate changes are an evolutionary reflection under the combined influence of political, economic, financial and other factors. If we only consider the interest rate parity relationship in the international financial market (the most basic analytical model for interest rate changes in the international foreign exchange market), then this round of US dollar strength will not exist – from a time perspective, the pound will raise interest rates earlier than the US dollar; from a policy perspective, the euro also face policy tightening. For the RMB whose capital account is still under control, the interest rate parity model is not applicable, so the change in the interest rate difference between China and the United States cannot explain the recent changes in the RMB exchange rate.
From the perspective of relative changes in inflation, both Europe and the United States are facing inflationary pressures. From the perspective of the magnitude and persistence of inflation, the United States has a higher degree of inflation and stronger persistence expectations. In March 2022, the CPIs of the United States, Europe, and Japan were 8.5, 7.4, and 1.2, respectively. From the perspective of the inflation process, the United States entered high inflation earlier. From May 2021, the US CPI entered above 5.0, while the same level in Europe was in December 2021. Obviously, inflation differences are not the main reason for this round of dollar strength.
Although from the perspective of national interests, the rise in commodities caused by the Russian-Ukrainian war has benefited the United States (selling more resources at high prices) and hurt Europe (need to spend more money to import resources), but the impact on the US and European economies is in the same direction of. In addition, judging from the worse trend of the yen, traditional safe-haven currencies have not shown the characteristics of “risk-off” in the current international turmoil. From the perspective of economic process, it is an indisputable fact that the Western world has not yet emerged from the shadow of the 2008 global financial crisis; the epidemic has not ended for more than two years, and its damage to the momentum of economic development has not yet been considered by people from all walks of life; superimposed on the conflict between Russia and Ukraine Due to geopolitical influences, the cracks in the world economy or permanent expansion, and the impact on the global supply chain system have forced countries to seriously consider the restructuring of the industrial chain in the process of economic recovery, which in turn has intensified the “decoupling”! Obviously, the economies of all countries are facing difficulties in growth and recovery, which makes the trend of currency exchange rates in various countries less consider policy and market-level factors, and more and more rely on the importance of economic growth prospects. However, under the realistic scenario that each country has its own “difficulty in reciting the scriptures”, the exchange rate trend of various countries does not actually reflect the improvement of a country’s economy, but is relatively good in comparison with other countries.
Since 2020, China’s success in epidemic prevention and control has created a leading position in China’s economy in the global economy, and the renminbi has entered a stage of continuous appreciation. During the same period, the changes in the Western currency system have entered the stage of “pulling a general out of the shadows”, which is relatively less bad. The economy’s currency wins, however, that currency (i.e. the U.S. dollar) still has no advantage over the renminbi.
Obviously, this advantage of the renminbi will not come to an abrupt end after late April. The impact of the Shanghai epidemic has made the market believe that the epidemic situation at home and abroad will be reversed, and the advantages of the Chinese economy due to the epidemic will not only be lost, but may also be turned into disadvantages. The first quarter data has strengthened this expectation. The various chaos that occurred in Shanghai during the closure of the city played a subtle role in lowering expectations for China’s economic prospects. The “three killings” of stocks, bonds and foreign exchange indicate the sudden deterioration of the market’s confidence in China’s economic prospects.
However, the scientific understanding of the virus will eventually be known to the world. Warmer weather will also help the epidemic to subside. The epidemic prevention policy will persist until victory is in sight. The society is already preparing for a full resumption of work, and the focus on the impact of the epidemic has turned to the post-epidemic Resumption of work and normalized management mechanism. The meeting of the Political Bureau of the Central Committee of the Communist Party of China on April 28 was even more timely for the restoration of market confidence. The revision of the excessively pessimistic outlook for China’s economy will reverse the RMB exchange rate and slowly advance towards the original balance zone.
Note: This article only represents the author’s personal views