The RMB fell below 7.3, hitting a new low in seven and a half months

Currency devaluation is not unique to China. Against the backdrop of high interest rates in the United States, Asian currencies have fallen to their lowest levels in over 19 months. Among them, the Japanese yen has reached a 38-year low against the US dollar.

The renminbi (RMB) exchange rate continues to decline.

On June 26th, after the market closed, the offshore RMB exchange rate against the US dollar broke through the 7.3 threshold, setting a new low for seven and a half months. On June 27th, the opening price of the offshore RMB remained low, reported at 7.3004.

At the same time, in the early session on June 27th, the onshore RMB exchange rate against the US dollar continued to fall, reported at 7.2665, also setting a new low for nearly seven and a half months.

This is a further continuation of the RMB exchange rate devaluation. On June 11th, the onshore RMB exchange rate against the US dollar crossed 7.25, reaching a new low in nearly seven months. On that day, the lowest intraday value of the onshore RMB against the US dollar was 7.2545, a 1.4% decrease from seven months prior.

In addition, the RMB exchange rate midpoint has also been weakening continuously. As of June 27th, the RMB exchange rate midpoint has fallen for seven consecutive days, also setting a new low for over seven months. On that day, the value was 7.1270.

Currency devaluation is not unique to China. In the context of high interest rates in the United States, Asian currencies have fallen to their lowest levels in over 19 months. Among them, the Japanese yen has reached a 38-year low against the US dollar.

Xing Zhaopeng, a senior China strategist at ANZ Bank, believes that the strengthening of the US dollar, with the RMB as a low-interest currency, also faces the dilemma of carry trade. The current RMB exchange rate is greatly influenced by the external environment. The prospect of the Federal Reserve's interest rate cut is uncertain, and there is still a possibility that the Eurozone will continue to lower interest rates, coupled with the rightward shift in the French parliamentary elections, which has led to the continuous strengthening of the US dollar index.

Zhang Jiantai, Chief FX Strategist for Asia at Mizuho Bank, stated that the seven consecutive days of decline in the RMB exchange rate midpoint highlight the increasing tolerance of regulators for an orderly devaluation of the currency. The People's Bank of China (PBOC) may consider the low point of 7.3503 yuan in September 2023 as the final bottom line. With policy efforts, China's economy is improving, which will provide support for the RMB exchange rate.

Seven consecutive days of decline in the midpoint.Xing Zhaopeng believes that the depreciation of the Chinese yuan exchange rate is mainly due to external factors. The Federal Reserve's interest rate cut expectations have been repeatedly postponed, which has pushed up the US dollar index. At the same time, in the European market, there is still a possibility that the Eurozone will continue to cut interest rates, coupled with the rightward shift of the French parliamentary elections, which has led to a continuous weakening of the euro. Since the euro has the largest weight in the US dollar index, this in turn has driven the US dollar to strengthen.

On June 25, Federal Reserve Governor Bowman indicated that it is expected that there will be no interest rate cuts by the Federal Reserve in 2024, and its rate-cutting actions may be postponed until 2025. Affected by this, on June 27, at the opening, the US dollar index had risen to a high of 106.05.

On June 26, the Chief Economist of the European Central Bank, Lane, stated that as time goes on, the central bank expects more interest rate cuts.

The first round of voting for the French National Assembly elections is about to take place, and the far-right party, the National Union, has expanded its leading advantage. Bloomberg's comprehensive polls show that the support rate for the National Union has risen to 35.4%, while the support rate for the broad left-wing alliance has dropped to 28.1%. Generally speaking, far-right parties tend to advocate for Brexit policies, which are not conducive to the euro.

As the exchange rate depreciates, the Chinese yuan exchange rate central parity rate has also fallen to a low point of over seven months. As of June 27, the Chinese yuan exchange rate central parity rate was reported at 7.1270, having fallen for seven consecutive days, setting a record for the longest decline in a year.

The Chinese yuan exchange rate central parity rate is set by the People's Bank of China, and the current trading rules stipulate that the intraday fluctuation range of the onshore yuan spot price cannot exceed 2% above and below the central parity rate. The central parity rate not only restricts the rise and fall of the onshore yuan but also sends an important policy signal for the future trend of the yuan.

In Xing Zhaopeng's view, the steady upward movement of the Chinese yuan exchange rate central parity rate highlights the regulatory tolerance for an orderly devaluation of the exchange rate, which is continuously increasing.

"The reason behind this is that as the quarter-end approaches, a large number of carry trade transactions need to be closed out, narrowing the spread between the central parity rate and the spot exchange rate can guide these positions to close out in advance, releasing depreciation pressure. In addition, many enterprises with foreign-related business currently value their foreign currency assets and liabilities in their semi-annual reports based on the Chinese yuan exchange rate central parity rate, and narrowing the spread also helps enterprises to manage exchange rate risks," he said.

Zhang Jiantai also believes that the regulatory tolerance for an orderly devaluation of the Chinese yuan exchange rate is continuously increasing. Although the China-US interest rate differential poses a persistent pressure on the yuan, considering that the yuan's basket exchange rate is still relatively strong, there is still some room for moderate depreciation of the yuan against the US dollar.

As of June 21, the CFETS Chinese yuan exchange rate index was reported at 99.97, which is a 2.6% increase from the beginning of the year.Controllable Devaluation Risk

Looking ahead to the RMB exchange rate in the second half of the year, Xing Zhaopeng believes that although the RMB exchange rate faces pressure, it will still fluctuate within the range of 7.25-7.30. From a technical perspective, the onshore RMB exchange rate has not broken through the three key levels of 7.27, 7.28, and 7.30. In addition, China's large state-owned banks continue to provide the market with US dollar liquidity, which makes the devaluation risk of the RMB exchange rate controllable. "The future trend of the RMB exchange rate still needs to focus on the Federal Reserve," he said.

Zhang Jiantai believes that the People's Bank of China is expected to continue to release RMB devaluation pressure, but will regard the low point of 7.3503 in September 2023 as the final bottom line. In the short term, the RMB exchange rate will still maintain a relatively slow rate of devaluation. If the RMB spot begins to deviate from the lower limit of the trading range, it indicates that the RMB devaluation pressure has been released.

As for how the Federal Reserve will cut interest rates in the second half of the year, Goldman Sachs believes that the Federal Reserve may start two interest rate cuts in September and December.

Stephen Dover, Chief Market Strategist at Franklin Templeton, said that at the June interest rate meeting, the Federal Reserve sent a hawkish signal. However, Federal Reserve officials still expect to cut interest rates five times by the end of 2025, which means that in the long run, the Federal Reserve's monetary policy will still move towards easing. In the future, the Federal Reserve's monetary policy will continue to be highly dependent on data. Currently, the US economic activity continues to expand steadily, and inflation has eased but remains at a high level.

Xing Zhaopeng stated that when US inflation stabilizes and consumption weakens, the Federal Reserve's room for interest rate cuts will further increase. The University of Michigan's Consumer Sentiment Index in the United States has fallen close to the key level of 60, which suggests that the momentum of US consumption may stall.

The 2024 US presidential election is entering the television debate phase, and geopolitical factors will also affect the RMB exchange rate.

In Xing Zhaopeng's view, if the Republican presidential candidate Trump wins the election, he may pose a threat to the RMB exchange rate by imposing tariffs. Every 10% increase in tariffs by the US government may bring a 1.5% devaluation pressure on the RMB exchange rate.

Goldman Sachs said in a research report on June 25 that speeches and actions around global trade policy are becoming more hawkish. If Trump wins the election, it may lead to high tariffs on US imported goods, and retaliatory measures and friction escalation may follow. The trade policy uncertainty index has risen to the highest level since the trade war in 2018-2019. According to the bank's calculations, the risk of trade war has dragged down the year-on-year growth rate of investment by US listed companies by 0.3 percentage points.

Stephen Dover said that for American voters, economic issues have always been more important than any other issue. Many voters are complaining about the high overall prices during the Biden administration. For many American families, the inflation problem in the United States is mainly attributed to the budget deficit caused by "Bidenomics" or some "mistakes" made by the Federal Reserve.Additionally, the fundamentals of China's economy are also one of the significant factors affecting the exchange rate of the Chinese Yuan (RMB).

Xing Zhaopeng believes that, judging from data such as inflation, industrial production, and exports, China's economy is stabilizing and improving. Whether the fundamentals of China's economy can continue to recover in the future depends on the strength and effectiveness of fiscal policy measures.