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Can the year-end rally push the RMB back to 6 against the US dollar next year?

Can the year-end rally push the RMB back to 6 against the US dollar next year?

As the end of 2023 approaches, the RMB exchange rate against the US dollar has been under pressure and fluctuated for most of this year. After falling below the integer mark of 7 in May this year, it has maintained a two-way fluctuation trend.

Data map: Staff of a bank in Taiyuan, Shanxi Province count currency.Photo by China News Service reporter Zhang Yun

As of December 16, the lowest spot exchange rate of onshore RMB against the U.S. dollar reached 7.3498 on September 8; by the end of October, it fluctuated around the 7.3 line; entering November, a wave of rebound began, and on December 16 The highest value has exceeded 7.1.

It is worth noting that the Federal Reserve’s 2023 interest rate meeting has “no action” for three consecutive times and has begun to discuss the topic of interest rate cuts. As factors affecting external liquidity have eased, the RMB exchange rate has gained impetus for appreciation.

The previously released China’s Monetary Policy Implementation Report for the third quarter of 2023 added “three resolute” statements to the next stage of exchange rate policy, namely: resolutely correct market procyclical behavior, resolutely deal with behavior that disrupts market order, and resolutely deal with behavior that disrupts market order. Prevent the risk of exchange rate overshooting and propose to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. This shows the central bank’s determination to maintain the smooth operation of the foreign exchange market.

So, can this wave of gains that occurred at the end of this year continue into 2024? Can the RMB return to the 6 range next year?

According to Guan Tao, global chief economist of BOC Securities, China’s central bank’s exchange rate regulation is just to buy time for economic adjustment. There are probably three scenarios for the trend of the RMB next year.

Under the neutral scenario, the RMB trend will fluctuate strongly, the Federal Reserve’s monetary policy will shift, and the resilience of external demand and the recovery of domestic demand are expected to increase the attractiveness of RMB assets.

Under an optimistic scenario, the RMB will trend stronger, financial turmoil in the United States and inflation will accelerate downward, forcing the Federal Reserve to loosen monetary policy quickly, and the “smiling dollar curve” will accelerate the evolution, and the RMB may rebound significantly in 2024.

Under the pessimistic scenario, the trend of the RMB is volatile and weak, the United States has “escaped” economic recession and reflation, the Federal Reserve has to postpone its turn and may even further raise interest rates, the external environment of the RMB will remain severe, and the domestic economy may need to reach positive output levels. Only the gap can offset the market’s doubts.

Guan Tao reminded that linear unilateral thinking should be avoided. When the exchange rate is relatively flexible, flexible adjustment of the exchange rate can help release market pressure in a timely manner and avoid the accumulation of expectations.

Sheng Songcheng, a professor at China Europe International Business School and former director of the Survey and Statistics Department of the People’s Bank of China, believes that the interest rate differential between China and the United States will enter a stable period, but China’s monetary policy needs to consider internal and external balance, which is one of the reasons why China is more cautious in cutting interest rates. In the future, the interest rate differential between China and the United States and its changing trend will be one of the important factors that determine the exchange rate. The RMB may maintain a moderate appreciation trend, but the extent of appreciation will be limited.

Everbright Securities released a research report stating that looking forward to 2024, the Sino-US economic and monetary policy cycles are expected to move from divergence to convergence, driving the RMB into an appreciation channel, but the space is limited by the decline in the US dollar index.

Cui Li, managing director and head of macro research at CCB International, believes that there are two factors that will benefit the RMB exchange rate against the U.S. dollar next year: the first is trade. The trade surplus is supported by structural factors, and trade should see positive growth next year; the second is the U.S. dollar. The dollar is expected to continue to weaken amid volatility next year.

Cui Li said that as the Federal Reserve stopped raising interest rates, the U.S. dollar fell, and the RMB exchange rate against the U.S. dollar rebounded. We predict that the RMB against the U.S. dollar will continue to strengthen slightly amid fluctuations and will return to below “7”.

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