Yang Ma
On the evening of August 24, a “counter-cycle factor” that had been quiet for more than a year re-emerged from the rivers and lakes, and the onshore and offshore RMB rose by a thousand to around 6.8. In the morning of the same day, due to the positive news that the latest negotiations between China and the United States did not update, the RMB once fell to around 6.9.
What are the major factors that caused the yuan to rise suddenly? What is the "counter-cycle factor"? What is the future trend of the renminbi? How do Chinese and American political considerations affect the exchange rate?
"Counter-cycle factor" re-emerges
"On the morning of August 24, the Sino-US trade consultation did not have the latest good news. I thought that the renminbi would fall sharply, but in fact it did not. The decline was very limited. In fact, the market has already priced pessimistic expectations and has become accustomed. It can be seen that the RMB was oversold in the early period. And most of the day, the offshore RMB is actually stronger than the onshore price.” An offshore trader’s foreign exchange trader mentioned to the author.
In fact, before the counter-cyclic factor officially “returned from the rivers and lakes”, many traders have already expressed their willingness to “float more”. After all, past experience tells them that it is a price to continue to bear the renminbi above 6.9. Some foreign funds have already understood this truth.
On the evening of August 24, the China Foreign Exchange Trading Center issued a notice saying that most of the middle price quotation lines have adjusted the “counter-cycle factor”. It is expected that the “counter-cyclic factor” will keep the RMB exchange rate at a reasonable and balanced level. Stabilization plays an active role. Boosted by this news, the exchange rate of the RMB against the US dollar soared rapidly. The onshore renminbi against the US dollar exchange rate rose more than 200 points in the night; the offshore renminbi rose more than 600 points against the US dollar, approaching the 6.8 mark.
What is the countercyclical factor? Since the central bank sets the middle price on a daily basis based on the overnight dollar and a basket of currencies, the day's trading fluctuates around the middle price range of 2%. The addition of the countercyclical factor increases the flexibility and uncertainty of the mid-price setting. For example, during the appreciation of the renminbi, if the value of the revaluation from 6.8 to 6.7 on the day, the middle price should be 6.75 on the second day, but now it is possible to set the factor. Let it become 6.76 or 6.77, that is, the rise is slower, change people's unilateral expectations and reduce the predictability of the middle price, and if the depreciation is too heavy, the middle price is set stronger. In fact, part of the reason for the outbreak of the US subprime mortgage crisis in the past was the procyclical operation, so management is not expected to be ignored.
The first introduction of the countercyclical factor was in May 2017. At that time, the US dollar index fell from 100.71 on April 7 to 98.75 on May 5, a drop of 1.95%; but in the same period, the central parity of the yuan rose from 6.8949 to 6.8884, an increase of only 0.09%. The market's expectation of the depreciation of the renminbi is still too heavy, and there is also a herding effect of selling, which began to change after the countercyclical factor appeared.
The effect of the countercyclical factor is mainly reflected in three aspects: the restart countercyclic factor is aimed at the procyclical behavior existing in the foreign exchange market; secondly, restarting the countercyclic factor is expected to alleviate some of the depreciation pressure; third, restarting the reverse cycle Factors help to reduce the conflict between exchange rate stability and interest rate policy (if you need to support the economy with moderately loose monetary policy, then you need to continue to reduce or moderately release liquidity, which will continue to exert pressure on the devaluation of the renminbi, After the introduction of the countercyclical factor, the selling pressure of the RMB will be appropriately alleviated, and the exchange rate will be avoided.
Some analysts pointed out that the gap between bank settlement and sales in June and July has been narrowed continuously. However, the recent depreciation is mainly due to the impact of the rise of the US dollar index and trade friction. The fundamentals of China's economy have not changed significantly. The countercyclical factor is designed to hedge. The market's procyclical behavior guides market expectations, prevents the formation of excessive "flock" effects, combats arbitrage funds, and prevents the RMB exchange rate from deviating too much from the fundamentals.
Dollar longs
In fact, the surge in the renminbi is also closely related to the dollar's long-term retreat. The counter-cyclic factor is not all factors.
The US central bank, Federal Reserve Chairman Powell’s dovish remarks made during the global central bank’s annual meeting last Friday, completely defeated the bullish confidence. The general idea of his speech at the time was that "the United States will continue to raise interest rates, but there is no reason to accelerate the rate hike." This caused an expected difference, which led to the loss of confidence in the dollar bulls.
Powell mentioned that although he said that “there is good reason to expect the US economy to continue to perform strongly”, it emphasizes that “there is no indication that the risk of overheating is rising, and the Fed has not seen a clear signal that inflation has accelerated by more than 2%. A step-by-step rate hike can avoid raising interest rates too slowly and too fast.” Currently, the market generally expects that the Fed will raise interest rates once in September and December, respectively, for a total of 50 basis points, and this expectation has long been marketed. digestion.
Earlier, the dollar bulls were holding their breath and paying attention to the annual meeting. Recently, the US dollar has been at an extreme value against almost all G10 currency positions. The cyclical valuation model shows that the US dollar is overvalued by about 2%. In the short-term, due to the huge size of the US dollar bullish, the risk of further falling of the US dollar caused by the profit is still there, so Powell’s speech has also received much attention. It was also because of Powell’s unexpected dovish remarks that the dollar’s long exposure was cleared, which led to the dollar’s selling pressure.
Although the US economy is currently on the verge of a short-selling GDP of 4.1% in the second quarter, the Fed seems to be worried about more long-term issues, such as how to deal with the next recession, how to solve structural problems, how to deal with the expanding fiscal deficit, etc. It seems that it has not been so optimistic in the long run.
At present, the Fed has seen three major risks in the economy – real estate, trade frictions, and fiscal deficits.
As mentioned in the minutes of the Fed meeting released last Thursday, the Fed believes that “real estate seems to be weakening signs, which may reflect the decline in residents' affordability, rising mortgage rates, and delays in building permits.”
The second biggest risk is trade friction, which all members consider to be a major source of uncertainty and risk. The Fed believes this will lead to a decline in employment, a decline in household purchasing power, a low productivity, and a possible disruption of the value chain.
The third biggest risk is that fiscal policy is considered to be the biggest upside risk in the economic outlook. The minutes suggest that tax cuts may not give the economy the momentum that was previously expected. The tax reform may not be as big as the demand effect, because the current resource utilization rate is already sufficient, and the multiplier effect of the tax reform is not expected to be significant as in other economic cycles.
The Fed even believes that if the downward momentum of fiscal momentum is faster than expected, or the subsequent fiscal tightening is stronger than expected, it is likely to pose a downside risk to the economy.
In fact, many traders have said before that there is no dollar that can only rise or fall. The dollar will return in its own way. The US economy is experiencing rising interest rates and strong US dollars despite rapid expansion and no signs of depression in the short term. And tariffs will hit US exports, and the historically low unemployment rate means that it is difficult for the United States to find cheaper labor, and fiscal incentives such as tax cuts in the late cycle will increase the financial burden. Therefore, there is no need to worry that the dollar will continue to rise forever, and everything will be self-correcting. Mean regression.
Future RMB is expected to be stable
Looking at this year, it seems that the market does not have to worry too much about the “breaking 7” risk. The expectation of the RMB exchange rate in the medium term is basically stable from a trading perspective or a policy perspective.
"Now the trading volume of offshore renminbi is very small, because after all, no one is willing to act rashly at the point of 6.9, but because of the small amount of trading, it is easy to rise and fall as soon as the wind is blowing. But as long as it reaches 6.9 or 6.95, traders Basically, they will not continue to chase. On the contrary, they will turn to the yuan." A foreign exchange trader of a large bank previously disclosed to the author.
As for the future trading ideas, it also said, "At this point (6.8), I may be flat, because there are a lot of exposures (short RMB) have been cleared in the past few weeks, so there is no need to act rashly. The key to the future may be that the Chinese central bank will continue to lower the RRR, probably in September, then this may put a small pressure on the renminbi. But overall, the selling pressure is much smaller than in June, shorting the mood of the renminbi and Not strong."
In addition, the political considerations between China and the United States are also not negligible at the transaction level. The renminbi has depreciated by nearly 10% against the US dollar this year. If it goes further, it will be hard not to cause Trump’s “speaking and slashing”, and this pressure is undoubtedly greater in the time window of Sino-US trade friction.
As early as last month, Trump once again expressed dissatisfaction as the US dollar index soared from the low of 88.2 and broke the important resistance level of 95. In an interview, he said that the US dollar is not conducive to the United States. He is also dissatisfied with interest rate growth. He is worried that higher interest rates will put the United States at a disadvantage. He pointed out that when the European Central Bank and the Bank of Japan maintain monetary easing, the Fed’s interest rate hike may be unfavorable to the United States. Trump’s speech made the dollar fall from a one-year high.
Most institutions expect that the RMB exchange rate is expected to break away from the continuous depreciation pattern in the short term, showing a two-way fluctuation. In the medium term, the US economy is steadily improving, the Fed is gradually raising interest rates, the European and Japanese central banks maintain policy easing, and the dollar index is still supported under the conditions of currency crisis in some emerging economies. Coupled with the impact of trade conflicts, the renminbi still has some depreciation pressure. However, China's economic fundamentals are steadily supporting the renminbi. Even if this year's economy shows signs of weakness, the pressure of continued economic downturn after the policy shift will not continue to increase sharply. Coupled with countercyclical adjustments, all sectors believe that the renminbi continues to depreciate sharply. The possibility is small.
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