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Chinese Yuan Soars Again!

On the afternoon of Thursday, August 29th, both the offshore and onshore Chinese yuan appreciated against the US dollar, breaking through the 7.10 mark, with intraday gains exceeding 300 pips. Among them, the onshore yuan reached its highest level since December 29th of the previous year.

This indicates that after the offshore yuan wiped out all its losses for the year at the beginning of August, the onshore yuan has also recovered its losses for the year.

As of press time, the onshore and offshore yuan were reported at 7.0932 and 7.0931, respectively.

In terms of news, on August 29th, 2024, the People's Bank of China conducted an open market operation bond buyout transaction through a quantity bidding method, purchasing 400 billion yuan of special treasury bonds from primary dealers in open market operations.

Additionally, according to the central bank's website, on August 26th, Pan Gongsheng, Secretary of the Party Committee and Governor of the People's Bank of China, presided over a symposium with representatives and members of the Two Sessions, experts and scholars, and financial enterprise leaders. During the meeting, it was stated that they will continue to adhere to a supportive monetary policy stance and strengthen counter-cyclical adjustments.

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What is the reason behind the sustained strength of the yuan?

Since July, the yuan has shown considerable strength, with both onshore and offshore exchange rates appreciating by more than 2% over the past month. What are the reasons?

This is mainly influenced by a combination of domestic and international factors.

Domestically, the yuan exchange rate is primarily supported by the domestic economic fundamentals, the continued weakening of the US dollar, and the increased attractiveness of yuan-denominated assets; internationally, the expectation of a Federal Reserve rate cut has, to some extent, boosted the yuan exchange rate.Boc Securities' Global Chief Economist, Guan Tao, stated that the divergence in economic cycles and monetary policies between China and the United States is showing a converging trend, and the U.S. interest rate cut has played a role in alleviating pressure on the RMB exchange rate.

According to China Daily, Liu Chunsheng, an associate professor at the School of International Trade and Economics at Central University of Finance and Economics, said that influenced by the expectation of interest rate cuts, the market has reached a consensus on the weakening of the U.S. dollar, leading to the recent appreciation of the RMB.

In addition, the "trillion-dollar inflow" under the expectation of the Federal Reserve's interest rate cut has also supported the RMB exchange rate.

Caixin previously mentioned that, in the view of Stephen Jen, the proponent of the "smile theory," once the Federal Reserve cuts interest rates, the narrowing interest rate differential between China and the United States will make U.S. dollar assets "lose their charm," and the liquidation of RMB carry trade may prompt a trillion dollars' worth of corporate settlement funds to flow back to China.

Just last week, Federal Reserve Chairman Powell clearly shifted his stance in his speech at the Jackson Hole central bank annual meeting, stating that the time for an interest rate cut has come, which implies that the Federal Reserve's interest rate cut plan in September is almost "a done deal," providing an excellent opportunity for the appreciation of the RMB, potentially pushing it up by 10%.

According to the estimation of CITIC Construction Investment, a settlement of around 10 billion U.S. dollars could theoretically support the RMB exchange rate against the U.S. dollar by about 1000 pips (0.1).

The People's Bank of China may take measures to prevent significant fluctuations.

Currently, most economists expect the Federal Reserve to cut interest rates by 25 basis points for the first time in September and then cut another 25 basis points in each of the following two meetings.

As the Federal Reserve embarks on a new round of interest rate cuts, will the RMB exchange rate continue to rise? China Daily reported that the People's Bank of China may take measures regarding significant fluctuations in the RMB.

Xiong Aizong, a senior researcher at the Institute of World Economics and Politics, stated:"The appreciation of the renminbi may not be as pronounced as Jen anticipated, and the expected interest rate cuts in the United States are likely to be a gradual process."

"In the event of renminbi appreciation, the People's Bank of China and others will take measures to prevent significant fluctuations in the value of the renminbi."

Liu Chunsheng estimates that the resistance level for the renminbi exchange rate against the US dollar in the near term is between 7 and 7.05, showing a mild recovery trend.