RMB Plunges 1,000 Points Against Market Trends
The Federal Reserve has announced that it will maintain the benchmark interest rate at a range of 5.25%-5.50%, marking the seventh consecutive quarter this institution has kept its policy unchanged. It seems that the anticipated interest rate cut may be delayed. Given the current situation, it is likely that the Federal Reserve may only implement one rate cut this year. This has significant implications for the foreign exchange market, especially the renminbi, which has already fallen below 7.26. Will the renminbi exchange rate of 7.28 hold?
A Shift in the Federal Reserve's Tone
Recently, every move by the Federal Reserve has undoubtedly become a focal point of global interest.
The Federal Reserve recently stated that its benchmark interest rate would solidly remain between 5.25% and 5.50%. Since the end of September last year, this marks the seventh time the institution has kept its existing policy unchanged.
Interestingly, the Federal Reserve's stance on whether to further lower interest rates seems to have shifted slightly.
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According to the latest dot plot released in June, which illustrates the Committee members’ predictions for future interest rates, we can see that among the 19 decision-makers, 11 now believe there may only be one rate cut this year.
The remaining 8 believe there might be two cuts. This represents a significant change from the situation in March.
In March, most decision-makers predicted at least three rate cuts this year, with some even suggesting four cuts could be possible.
During the June meeting, the Federal Reserve still expressed high alertness to inflation. They mentioned that although inflation has recently slowed—May's year-on-year CPI increase was 3.3%, slightly down from April's 3.4%—the pressure from inflation remains substantial.
In its statement, the Federal Reserve noted that while some progress has been made in lowering inflation, the momentum of price increases remains strong.
He stated that while the May CPI report is quite encouraging, they need to see more evidence in the coming months to confirm that inflation is indeed on track to meet the 2% target before considering any rate cuts.
He particularly pointed out that there are currently no reasons to ease monetary policy.
Powell reiterated that the Federal Reserve will maintain high interest rates until it is sufficiently confident that inflation is consistently controlled near the 2% target level for the year.
At the same time, he warned that rushing into rate cuts at this stage could potentially trigger a substantial rise in prices again.
Despite this, Powell also mentioned that plans for future rate cuts are not set in stone. Decision-makers will adjust policies as economic growth and inflation indicators change.
He noted that while there is now positive inflation data, it should not warrant hasty action simply due to one favorable report.
Looking at future plans, even though expectations for rate cuts have significantly decreased, some members of the Federal Reserve have pushed back their rate cut expectations to 2025.
Furthermore, the dot plot indicates that by the end of next year, there may be four rate cuts, and by the end of 2025, the benchmark interest rate is expected to drop to around 4.1%.
Powell expressed that interest rates should return to appropriate levels by the end of 2025 and 2026, albeit later than initially anticipated.
Renminbi Depreciation Against the US Dollar
During this period, the renminbi has begun to slide against the US dollar, which has taken many by surprise.
As of 3:30 PM on June 13, the offshore exchange rate for the renminbi was approximately 7.265. Since the low of 7.165 in early May, the renminbi has already dropped by 1000 basis points.
This change is largely influenced by the Federal Reserve's slowdown in the pace of interest rate cuts.
Currently, the situation is that Wall Street's big players are not optimistic about the Federal Reserve making 2 to 3 more rate cuts this year; it is likely that there will only be one cut or possibly none at all.
As a result, US Treasury yields may remain elevated, thereby enhancing the attractiveness of the dollar.
Last weekend, unexpectedly strong employment data in the US directly led to a rapid increase in the ten-year Treasury yield from a low of 4.245% in April to 4.448%.
This dramatic change has widened the interest rate gap between China and the US to a staggering 213 basis points. In other words, investing in US Treasuries is evidently more profitable compared to similar products in China, at least from a return perspective.
Recently, the renminbi exchange rate has continuously set new lows for the year, a phenomenon influenced not only by adjustments in the Federal Reserve's monetary policy but also closely tied to a series of international geopolitical risks.
Moreover, the volatility in the political landscape of Europe has also caused market concerns.
Recently, the rise of far-right parties in the European Parliament has undoubtedly heightened concerns about the future direction of Europe.
As market uncertainty intensifies, investors are withdrawing funds from emerging markets in search of safer investment havens.
Last week, Europe began its rate cuts ahead of the Federal Reserve, which inadvertently increased the attractiveness of the dollar relative to the euro. Consequently, a significant amount of investment capital has started betting on a rising dollar, leading to corresponding sell-offs of the renminbi and other emerging market currencies.
Additionally, the escalating tensions in the Middle East regarding the Israeli-Palestinian conflict and the situation between Russia and Ukraine have also intensified. Especially during the Dragon Boat Festival, a traditional Chinese holiday, the prices of traditional safe-haven assets like gold unexpectedly declined, adding to the factors driving more European and American capital towards investments in the US Treasury market.
This flow of funds is also a key factor leading to the depreciation of the renminbi exchange rate.
Overall, fluctuations in the renminbi exchange rate reflect not merely straightforward economic data but are also influenced by complex international political and economic factors at play.
Limited Decline of the Renminbi Against the US Dollar
With the Federal Reserve's delays in cutting rates, the entire Asian currency market has become quite unstable, with currencies like the yen, Indian rupee, and Vietnamese dong hitting new lows.
However, one might say that the renminbi has been relatively stable; although it has experienced a slight decline, it has dropped less compared to other currencies.
How has this happened?
In recent years, China's economic data has shown a promising trend, particularly in terms of exports. The latest statistics released for May indicate a positive growth momentum in Chinese exports, with a trade surplus reaching an impressive over 40 billion USD, which is certainly a remarkable figure.
Such outstanding trade performance provides solid support for the renminbi.
Let us also examine the status of China's foreign exchange reserves.
In fact, China is fully capable of utilizing these vast foreign exchange reserves to maintain stability in the renminbi exchange rate; however, thus far, the People’s Bank of China has not taken such actions, indicating that they believe the current exchange rate level is within an acceptable range.
Currently, many developed economies globally are beginning to enter a rate-cutting cycle. Just last week, both Canada and the European Central Bank announced rate cuts, and the Federal Reserve is expected to follow suit soon.
Once the Federal Reserve begins to cut rates, the dollar may weaken, which would be good news for the renminbi and could help raise its exchange rate.
In this context, considering both the fundamentals and market sentiment, the outlook for the renminbi should improve. External pressures will gradually lessen, and the depreciation of the renminbi against the US dollar should be limited, with even the possibility of reversing the current trend.
To speak frankly, opposing the current policy of the People's Bank of China may not be a wise choice. Although the central bank is not making significant moves or adopting a hardline stance at present, this reflects their tolerance for the current exchange rate and their trust in the forces of the market.
From a longer-term perspective, with the gradual improvement of China's economic development trends and the inevitable shift towards interest rate cuts by the Federal Reserve, it is highly likely that the renminbi exchange rate will rebound in the near future.
Currently, many overseas investment institutions share this view.
They believe that if the renminbi against the US dollar continues to decline without a substantial rise in the dollar index, the relevant departments in China are likely to intervene to stabilize the exchange rate once it falls below 7.28, ensuring that there are no abnormal declines.
This week, the CPI data from the US and statements regarding the Federal Reserve's monetary policy may have short-term impacts on the renminbi exchange rate, but in the long run, the fundamentals of the renminbi remain quite solid.
Therefore, for those who are bearish on the renminbi, caution is advised as they may face disappointment.
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