7.32! The exchange rate has plummeted! Approaching a one-year low

After two consecutive weeks of gains, the renminbi opened below the 7.31 mark against the dollar on September 6, and then fell further below 7.32, hitting an intraday low of 7.3217, approaching the weakest level of 7.3285 last October. The spot rate then recovered to 7.32 against the dollar.

The offshore yuan, which more reflects the expectations of international investors, also fell below the 7.32 mark against the dollar to the intraday low of 7.3277, down more than 200 points from the previous trading day.

After rising 0.67% in the previous session, the dollar index, which reflects the dollar's movement against a basket of currencies, continued to move higher on September 6, hitting 104.88 during the session.With the dollar index strengthening day after day, the yuan's rise against the dollar has been erased after the central bank announced that it would cut the foreign exchange reserve requirement ratio for financial institutions.

On September 1, the central bank announced that from September 15, 2023, the foreign exchange reserve requirement ratio of financial institutions will be lowered by 2 percentage points, that is, the foreign exchange reserve requirement ratio will be lowered from the current 6% to 4%.

Cicc pointed out that the RMB exchange rate may continue to face a more complex and severe internal and external environment in September, among which the probability of the US dollar index and US Treasury yields falling significantly in September is low, the internal factors will continue to be weak in September, but the possibility of further deterioration is also low, so it is believed that the RMB exchange rate may continue to be in the bottom stage under the maintenance of the stable exchange rate policy. 

After waiting for positive changes in internal and external fundamental conditions, the recovery market may start. On Friday (September 1), after the news of the cut in the foreign exchange reserve requirement ratio was released, the renminbi exchange rate climbed, ending the week at 7.2675, a weekly gain of 0.29%.

 However, the renminbi began to weaken again this week. Although China's manufacturing economy rose to the expansion range again in August, the expansion of the service industry slowed down, and the economic recovery momentum is still weak. Recently released August Caixin China manufacturing PMI recorded 51, 1.8 percentage points higher than the previous month, the second highest this year, only lower than February; The services PMI fell 2.3 percentage points to 51.8. The recovery in manufacturing was less than the slowdown in the services sector, dragging the composite PMI down 0.2 percentage points to 51.7 for the month, the lowest since February.

At the same time, the high dollar index is one of the key pressure points for the RMB exchange rate. As of 16:25 on September 6, the dollar index was trading near 104.7, hitting the key level of 105.

According to the latest survey of economists conducted by the National Association of Business Economics (NABE), about 69 percent said they see signs of a "soft landing" for the U.S. economy, a "significant shift" from the March survey. Goldman Sachs 'chief economist now puts the probability of a U.S. recession in the next 12 months at 15 percent, down from 35 percent in March. He now expects a gradual slowdown that will be "shallow and short-lived."

Despite the more optimistic about the U.S. economy, Robert Subbaraman, head of global macro research and co-head of global market research at Nomura China Investment Annual Meeting in 2023, said that the U.S. economy is expected to decline for two consecutive quarters starting in the fourth quarter, with a mild recession. However, he also said that it is difficult for the United States to cut interest rates in the near future, at least until March next year. And the rising deficit ratio has led to a rise in the supply of Treasuries and a continued decline in holdings by non-US investors, which should lead to higher yields than previously thought.

On the Chinese side, the direction of the renminbi's exchange rate depends on whether the current series of stimulus policies will be effective in boosting the economy. The Chinese government has continuously introduced "gift packages" in the capital market, real estate and other fields in order to stimulate the real estate, consumption, finance and other industries. 

But policy transmission takes time, especially for long-cycle industries such as real estate. If the stimulus works, the negative impact of the rate cut will be offset by the advantages of China's economic recovery, and the renminbi is expected to climb. On the contrary, the RMB exchange rate will bear the double pressure of interest rate cuts and fundamentals.

Returning to the level of fundamental factors, the depreciation pressure of the renminbi is still there for some time to come. The widening interest rate differential between China and the United States gives enterprises an incentive to deleverage in dollars and increase loans in yuan, which may keep depreciation pressure on the yuan.