Yuan Depreciation Expectations Return

The yuan has completed a short-term topping pattern. It broken the uptrend support in place since the late 2016/early 2017 bottom. The next area of support/resistance is in the mid 6.60s. If the yuan closes its performance gap with the euro this year, USDCNY would trade in the mid-6.60s.

A top headline in China today asks, what's the fallout from yuan depreciation? This article isn't great in its analysis, but it is great in that it tells us what's on the minds of Chinese investors. Depreciation expectations are waking up from their slumber.

iFeng: 人民币贬值究竟意味着什么？

Why is the U.S. dollar "more valuable"

The current 100 US dollars can be exchanged to 645 yuan, indicating that the exchange rate of the US dollar against the yuan is roughly 6.45. And about a few months ago when we were Spring Festival for the Year of the Dog, the exchange rate was 6.25, which means that 100 US dollars could only be exchanged for 625 yuan. It can be seen that compared with the Spring Festival, the current dollar is more valuable, which also shows that our RMB has depreciated.

Why did the dollar become more valuable in the past few months? The reason is that the economic prosperity of the United States continues to rise. Just a few days ago, the Fed announced an increase in interest rates. The market also expects that the United States will raise interest rates twice this year, and raising interest rates means that the price of assets denominated in dollars will rise. Not only that, the U.S. government expects their economic growth rate will rise to 2.8%, and inflation expectations will continue to rise. This further strengthens the global market’s expectation of a warmer U.S. economy and stronger asset prices.

More importantly, China has not followed the United States to raise interest rates. As a result, the level of interest rates between the United States and China has widened. Together with the strong US economic expectations, it will attract funds from the world and may include some overseas funds in China, and switch to the United States for greater investment. income. Under the combined effect of these factors, the number of people who want to use their own currency to exchange dollars will increase. Under the effect of supply and demand, the dollar will become more and more valuable.

As an example. The U.S. dollar index was very weak last year. In January 2017, the U.S. dollar index was around 103, but then it continued to decline. It fell to 92 in September, and even fell to around 88 before the Chinese Lunar New Year this year, compared to the beginning of last year. It went close to 15%. However, some economic indicators released by the United States after this appeared to be very strong. The sustained rapid rise of the US dollar since mid-April this year has risen from 89 to 95 now.

So from this perspective, the United States, with its global position and optimistic economic expectations, may continue to attract global funds for some time to come. The US dollar index is also expected to continue to strengthen. Therefore, except for certain countries or regions that have a fixed linked exchange rate system with the US dollar, the exchange rate between other non-US currencies and the US dollar has been depreciating without exception.

he overall renminbi remains strong

However, different non-U.S. economies have different levels of depreciation of the U.S. dollar. For example, the renminbi depreciated by about 3% against the U.S. dollar in the past two months. In the same period, the euro depreciated by more than 6% against the U.S. dollar. This is because the European economy is weaker than China and the regional political situation is not stable.

For another example, the Russian ruble depreciated against the U.S. dollar in the same two months, exceeded 4%, the South African rand depreciated about 14% against the U.S. dollar, and the Argentine peso depreciated against the U.S. dollar by more than 37%. In contrast, the renminbi against the U.S. dollar rose from a level close to 7 to 6.25 in February of this year at the beginning of 2017. During this period, the appreciation rate was close to 11%. The depreciation of 3% in the most recent two months was really not a big deal.

The sudden and significant drop in the Chinese stock market on June 19 may be a catalyst for market concerns. On the evening of the same day, the Governor of the People's Bank of China, Yi Gang, said in a heavy speech that China’s current economic fundamentals are good, its economic growth has increased its resilience, its total supply and demand has become more balanced, and its growth momentum has been accelerated. This year, the renminbi is one of the few currencies that have appreciated against the US dollar. one. Subsequently, A shares began to restore its rationality yesterday, which greatly eased market concerns.

In other words, since the U.S. economic recovery is expected to be even stronger, the Fed will raise interest rates several times in the future. Judging from the fundamentals of the economy, the two-way fluctuation in the exchange rate of the renminbi against the U.S. dollar is also a normal phenomenon. Contrarily, if the Chinese economy continues to decline and the yuan rose quickly against the dollar, that is rather a worrying thing.

Since USDCNY already rallied past 6.90 it may be the market won't be as jittery about a yuan depreciation. Outflows and depreciation expectations may not build as quickly as they did in 2015 and 2016. Still, there isn't a lot of room for this narrative. After today's move in the yuan, a 7.6 percent rally in USDCNY takes it to 7.00, at which point depreciation expectations will return with a vengeance. The market is relatively calm in a very narrow range between USDCNY 6.2 and maybe 6.9. Below 6.2, exporters go bust. Above 6.9 there could be significant outflows and financial market pressure.

RMB material maintains two-way fluctuations

Why are domestic investors worried about the devaluation of the renminbi? In fact, this is still "doing more thinking" in action. The most common and most popular investment method in China is undoubtedly the stock market. The vast majority of ordinary investors still rely on rising stock prices for gains. Therefore, it is easy for the subconscious to believe that no matter what the rise is right, the fall is wrong and it is wrong. The exchange rate of RMB against the US dollar was applied.

The most popular investment is housing, followed by wealth management products and trust loans, then stocks.

The exchange rate is a ratio between currencies. For ordinary domestic people, the dollar's exchange rate has gone up and down, and its impact on work and life is actually not great. In general, only those companies that need to rely on overseas markets in the areas of raw materials, product sales, etc., are likely to be affected by changes in exchange rates.

For example, domestic air transport companies need to rely on fuels such as oil imported from overseas, and oil is basically denominated in U.S. dollars. Once the RMB depreciates against the U.S. dollar, the RMB income from its service sales is used to exchange dollars for fuel. It will suffer more than before. On the contrary, the domestic garment production and trading enterprises will sell clothing shoes and hats produced in the United States to the US, and convert the US dollar into Renminbi for the payment of wages for domestic garment workers. Because the RMB depreciates, so the same dollar income can be Change to more renminbi, so the devaluation is beneficial to this clothing company. On the contrary, when the renminbi continues to appreciate against the U.S. dollar, domestic exporters such as garments and textiles will continue to be affected. In fact, under the current macroeconomic conditions of China's current economic downturn, new and old kinetic energy conversion, and financial deleveraging, the devaluation of the RMB is not a bad thing.

Therefore, the current trend of RMB depreciation against the U.S. dollar is both reasonable and consistent with the expectation of Sino-U.S. economic fundamentals. At the same time, relative to most developing countries, the RMB exchange rate still maintains its existing firmness and balance. It can be said that in the coming period of time, the trend of the depreciation and appreciation of the renminbi against the US dollar will continue, and the two-way exchange rate fluctuations will become more apparent.