On the last trading day of 2023, the spot exchange rate of RMB against the US dollar continued the appreciation momentum of the previous trading day.
On December 29, the spot exchange rate of RMB against the US dollar was reported at 16:30**0920, up 135 basis points from the previous trading day. For the whole year of 2023, the spot exchange rate of RMB against the US dollar will accumulate **1406 points, a decrease of 202%, compared with the annual decline of 9% in the whole of 2022, it has narrowed significantly.
Why the RMB exchange rate will decline slightly in 2023
In 2023, the RMB exchange rate has experienced a stage from appreciation to continuous depreciation and then to stabilization and recovery.
At the beginning of the new year, with the implementation of domestic policy measures to stabilize the economy, the successive introduction of optimized epidemic prevention and control measures and financial support for real estate policies, coupled with market expectations that the Federal Reserve will slow down the pace of interest rate hikes, the dollar index fell from a high level, and the RMB exchange rate against the US dollar fell from 6 in the first 10 trading days of this year95 appreciated rapidly and rose above 6 in one fell swoop on January 167 passes. Subsequently, the spot exchange rate of the renminbi against the US dollar fell back to 6 at the end of the first quarter amid two-way fluctuations9 or so.
Entering April, the RMB exchange rate against the US dollar continued to decline slightly, and on May 17, it fell below the "7" integer mark in both the onshore and offshore markets for the first time in more than five months. Subsequently, the RMB exchange rate accelerated and fell below 7.0% at the end of May10 passes, and broke through 7 after the Dragon Boat Festival20 passes.
As the Federal Reserve continued to raise interest rates, the spot exchange rate of the RMB against the US dollar depreciated to 7 in early SeptemberAround 35. Entering the fourth quarter, the RMB exchange rate began to stabilize and rebound, and since mid-November, the spot exchange rate of RMB against the US dollar has increased from 730 line strong ** to 710。
The Bank of China Research Institute pointed out that the main reason for the depreciation of the RMB exchange rate against the US dollar in 2023 is the "butterfly effect" caused by the strong US dollar index. In 2023, the Federal Reserve's monetary policy will continue to tighten, and the US dollar index will frequently show **strong***, resulting in the depreciation of the exchange rates of many currencies, including the RMB, against the US dollar. Second, the interest rate gap between China and the United States has widened to a record high. Third, the deficit in the settlement and sale of foreign exchange by banks on behalf of customers has widened.
The agency pointed out that the depreciation trend of the RMB against the US dollar in 2023 should be treated holistically. In fact, compared with the exchange rates of major currencies in the world, the RMB has depreciated against the US dollar to a lesser extent. In the second half of the year, the renminbi rose against a basket of currencies, the CFETS, reflecting the overall appreciation of the renminbi compared to major currencies other than the US dollar.
How will the RMB exchange rate go in 2024
With the renminbi regaining momentum against the US dollar at the end of the year, the market expects that it is expected to continue to stabilize and rebound in 2024.
In its outlook, Industrial Research pointed out that looking forward to 2024, the RMB exchange rate will remain stable and rise before the Spring Festival, and the US dollar will have the most momentum against the RMB after the Spring Festival, and there may be a third peak of the trend that will start in 2022. Smooth RMB appreciation** still needs to wait for domestic monetary policy tightening, US-China interest rate differentials** or onshore USD liquidity returning to easing. In addition, since the RMB follows the new paradigm of trading in the financing currency, if the Bank of Japan's interest rate hike leads to a reversal of the carry trade and the interest rate of the yen exchange rate**, the RMB exchange rate will be boosted by additional appreciation.
UBS** pointed out that the fluctuations in the interest rate differential between China and the United States, the yield of US Treasury bonds and the US dollar index may still bring about periodic fluctuations in the RMB exchange rate. Given the possibility of further easing of monetary policy by the central bank, the renminbi is likely to depreciate again against the US dollar in the first quarter of 2024. China's economic growth is expected to stabilize, and the central bank will not cut interest rates after next spring. At the same time, the agency expects the US economy to slow down in 2024 and the Fed to start cutting interest rates. The expected narrowing of the yield spread between China and the United States, the expected weakening of the US dollar, and the restoration of confidence in the Chinese economy will contribute to a slight appreciation of the yuan against the US dollar. Therefore, the exchange rate of the yuan against the US dollar is expected to be 70 (Previously, ** was 7.)15）。
The Bank of China Research Institute believes that looking forward to 2024, with the accumulation of external and internal positive factors facing the foreign exchange market, the RMB exchange rate against the US dollar has the basis and conditions for appreciation.
Among them, the positive factors mainly include, from an external point of view, the risk of a slowdown in the U.S. economy has increased, inflation expectations have cooled, and the U.S. Federal Reserve may end its interest rate hike cycle in 2024 and is expected to turn to interest rate cuts. In this context, the U.S. dollar index may continue to fall, the interest rate gap between China and the United States will continue to narrow, and the external pressure on the RMB exchange rate will be eased. From an internal point of view, first, there are more optimistic factors in domestic economic growth, and market confidence will continue to increase, helping the RMB exchange rate to rebound. Second, the domestic market will continue to increase its attractiveness to foreign investment. **The Financial Work Conference emphasized that "efforts should be made to promote high-level opening-up and steadily expand the institutional opening-up of the financial sector". It is expected that the convenience of cross-border investment and financing in China will continue to improve, attracting more foreign long-term capital to set up business in China. In the future, the good investment value of RMB assets will once again be highlighted, and foreign holdings of domestic financial assets will also increase. Third, China's exchange rate control policy tools are abundant, and the scale of foreign exchange reserves continues to rank first in the world, which supports the stability of the RMB exchange rate.
*: The Paper).