CNY Exchange Rate Rebounds Strongly
Beijing, August 30 - The Chinese yuan has shown strong momentum against the US dollar in the past 24 hours.
The official closing rate of onshore yuan against the US dollar was reported at 7.1102, up by 158 basis points compared to the closing rate of the previous trading day; the night session closed at 7.0980, up by 310 basis points compared to the previous trading day's closing rate.
Concurrently, the offshore yuan against the US dollar was quoted at 7.0943, up by 386 basis points compared to the New York close of the previous trading day.
On the afternoon of August 29, both offshore and onshore yuan against the US dollar broke through the 7.10 threshold, with intraday gains exceeding 300 points.
The onshore yuan against the US dollar broke through the key psychological threshold of 7.10, reaching a new high since December 29, 2023, and recovering its losses for the year.
In terms of macroeconomic policy, on August 29, the central bank conducted open market operations for the purchase of government bonds through a quantity bidding method, purchasing 400 billion yuan in special government bonds, including 300 billion yuan in 10-year "24 Continuation Special Government Bonds 01" and 100 billion yuan in 15-year "24 Continuation Special Government Bonds 02".
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Industry insiders pointed out that the central bank's regular buying and selling of government bonds in the secondary market has a significant impact, as it can increase the issuance of base money, affect the money supply, and thus influence the exchange rate; it can affect market interest rates, guide cross-border capital flows to influence the exchange rate; and it can also adjust monetary policy more flexibly to effectively respond to external shocks and maintain exchange rate stability.
The weak US dollar index has boosted the appreciation of the yuan.
The US dollar index has fallen by 5% since July, touching its lowest level this week at 100.5113, the lowest level since July 21, 2023.
The market widely expects the Federal Reserve to start cutting interest rates in September, coupled with a weakening of the US economic growth momentum, increasing market uncertainty about the US economic outlook, leading to pressure on the US dollar index.
Wang Youxin, a senior researcher at the Bank of China Research Institute, pointed out that these factors have jointly driven the counterattack of non-US currencies, from which the yuan has benefited.
The improvement in the China-US interest rate spread has enhanced the attractiveness of the yuan.
With the decline in US Treasury yields, the China-US interest rate spread has improved, making yuan assets more attractive.
In addition, the strengthening expectation of yuan appreciation has prompted exporters to settle foreign exchange in advance, further increasing the demand for the yuan.
Stephen Jen, CEO of the UK hedge fund Eurizon SLJ Capital, stated that in recent years, Chinese companies may have accumulated more than $2 trillion in overseas investments because the interest rates on these assets are higher than those on yuan-denominated assets.
When the Federal Reserve cuts interest rates, the attractiveness of dollar assets will be eroded, and it may stimulate a "conservative" capital inflow of $1 trillion.
Guan Tao, the Chief Global Economist at Bank of China Securities, also believes that due to the impact of international market fluctuations, there is a possibility of the yuan appreciating rapidly and significantly due to exporters settling foreign exchange and unwinding carry trades.
Guan Tao stated that the current baseline scenario is that the Federal Reserve will start preemptive rate cuts due to the slowdown in the US economy, which will be conducive to the stability of the yuan exchange rate; if the market eliminates one-sided expectations, and the reverse unwinding of carry trade positions occurs, there will be a rapid appreciation.
The domestic economic fundamentals support market confidence.
The stable growth of the Chinese economy, the high trade surplus, and the good balance of payments situation, these positive fundamental factors also provide strong support for the yuan exchange rate.
The recent Central Political Bureau meeting emphasized the growth stabilization goal, and it is expected that a series of growth stabilization measures will be introduced in the short term, enhancing market confidence.
Wang Qing, the Chief Macro Analyst at Orient Securities, said that as the effects of growth stabilization policies become apparent, and new quality production continues to develop rapidly, it is expected that the domestic GDP growth rate in the second half of the year will remain at around 5%, which will form an internal support for the yuan exchange rate.
Outlook for the yuan exchange rate trend.
Despite certain pressures on the yuan exchange rate, it is expected to maintain basic stability at a reasonable and balanced level under the joint action of internal and external factors.
From the market expectation perspective, the 12-month non-deliverable forward exchange rate (NDF) for the US dollar against the yuan has dropped from around 7.27 to around 6.9, fully reflecting the market's strong expectation of future yuan appreciation.
Li Liuyang and Shi Jie, researchers at the China International Capital Corporation Research Institute, said that the yuan exchange rate may not easily return to the previous low elasticity state in the short term, and the elasticity of two-way fluctuations may increase.
The longer-term trend of the yuan exchange rate depends on the repair of China's economic expectations and the direction of interest rates on one hand, and on the other hand, it depends more on changes in the overseas economic and financial situation.
If the return on overseas assets decreases and volatility increases systemically in the future, this will be conducive to the return of cross-border capital and the strengthening of the yuan.
Wen Bin, Chief Economist at China Minsheng Bank, said that although the pressure on the yuan exchange rate still exists, with the implementation of policies such as interest rate cuts in July and the acceleration of fiscal efforts, domestic demand is expected to be boosted, and the continuation of the recovery of external demand has a high degree of certainty.
Coupled with a rich set of exchange rate management tools, the yuan exchange rate is expected to maintain basic stability at a reasonable and balanced level, with the yuan-US dollar exchange rate fluctuating bidirectionally within the range of 7.1 yuan to 7.3 yuan for most of the time.
In summary, the recent performance of the yuan exchange rate reflects the changes in the global economic environment and the joint action of domestic and foreign policies.
Looking forward, the yuan exchange rate will continue to seek a new balance point in two-way fluctuations, showing stronger elasticity and resilience.
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