All Three RMB Exchange Rate Indexes Rise Together, with a Modest Q4 Strengthening Seen for the Yuan

Xinhua Finance, Shanghai, September 28 (Ge Jiaming) — Data released by the China Foreign Exchange Trade System (CFETS) show that all three RMB exchange rate indexes rose in the week ending September 24. The CFETS RMB Index stood at 102.93, up 0.39 for the week and its highest level since July 2022; the RMB index against the BIS currency basket rose 0.46 to 110.28, while the index against the SDR basket rose 0.48 to 97.79.

Last week (September 21-25), the US dollar index trended higher while most non-US currencies fell. The dollar index rose 0.82% over the week, the Australian dollar fell 1.4% against the greenback, USD/JPY gained 0.26%, and EUR/USD dropped 0.82%. The renminbi pulled back in choppy trading, with the onshore yuan down 0.23% and the offshore yuan down 0.42% for the week.

Dollar Rises for a Second Week as Treasury Yields Take Center Stage

Last week, US economic data and Federal Reserve officials' remarks jointly underpinned the dollar. Pan Xiang, a financial derivatives analyst at Nanhua Futures, said better-than-expected US PMI readings, a flurry of hawkish signals from Fed officials, and an oil-price rebound driven by geopolitical conflict led markets to further mark up tightening expectations, pushing the dollar index and Treasury yields higher in tandem.

Cai Shaoli, head of the FICC research group at Huatai Futures Research Institute, believes the main theme in dollar trading is shifting from "how far can the hiking cycle go" to "how high can Treasury yields rise," with trade factors weighing less on short-term moves as market attention refocuses on the US economy, inflation and interest rates.

Li Liuyang, a foreign exchange analyst at CICC, argued that since late August the dollar's strength has been driven by three factors: rising US interest rates, the Middle East conflict lifting inflation expectations, and the relative resilience of the US economy. Although the ECB and the Bank of Japan have also raised rates, the US composite PMI flash estimate climbed to 58.4 in September, the highest since July 2021, and the stronger economic performance keeps the dollar in an advantageous position.

In Cai's view, the dollar's supports are gradually shifting from safe-haven demand generated by the energy shock toward US demand resilience, inflation expectations and rising real rates. However, this round of hikes carries a strong flavor of responding to supply shocks, and if oil prices fall back from current levels, the sustainability of further Fed hikes remains to be seen.

Li also noted that while the dollar still has near-term support, its upside may be relatively limited. The UK, the euro area and Japan face rate-hike expectations of their own, and the interest-rate differential advantage of the US over other major economies may not keep widening, which could constrain further dollar strength.

The Yuan's Sensitivity to the Dollar Declines

Although the yuan pulled back in the second half of last week, over a longer horizon it has not simply moved inversely to the dollar.

Li Liuyang pointed out that between August 19 and September 22, the dollar index rose 1.8% while the RMB still appreciated 0.5% against it. The simultaneous strength of the dollar and the yuan in that period reflects the growing role of the currency's own supporting factors.

Cai agreed, noting that despite a marked widening of the 10-year China-US treasury yield spread this year, the RMB has continued to appreciate — evidence that the trade surplus, corporate FX settlement and onshore dollar supply are providing prominent support. After the Fed's September hike, the yuan even strengthened against the dollar at one point, showing reduced sensitivity to the dollar and to rate differentials.

In Li's view, the yuan's relative strength is underpinned jointly by policy guidance, expectations of stable China-US relations, and the recovery in exports and net FX settlement. The central parity rate was fixed stronger for consecutive sessions, and PBOC Deputy Governor Lu Lei said at a State Council Information Office briefing that China has no need for, and no intention of, seeking trade advantage through currency depreciation — remarks that helped steady market expectations.

Changes in FX supply and demand have also lent support. Citing data, Li noted that August exports grew 25.0% year-on-year, net settlement of foreign exchange rose markedly, the settlement ratio climbed to 61.5%, and forward sales and purchases of FX turned to net sales; corporate settlement demand is expected to keep being released around quarter-end. Meanwhile, the meeting between the Chinese and US heads of state and the new joint arrangements reached by the two trade teams also help anchor medium- to long-term expectations for the RMB.

That said, lower sensitivity to the dollar and to rate differentials does not mean the yuan is immune to external conditions. As Treasury yields climb further, holding dollar assets becomes more attractive, and some companies may slow their FX settlement; the previously concentrated release of settlement demand may also turn steadier.

Pan Xiang believes the recent dollar strength, together with changes in the pacing of central parity guidance, has pushed USD/CNY back above 6.70. With the National Day holiday approaching, increased FX purchases by residents traveling abroad may also affect short-term FX supply and demand.

As such, the current RMB trend is better characterized as a slowdown in the pace of appreciation. Export earnings and latent settlement demand continue to provide support, but the external rate environment is an increasingly binding constraint, and the rapid appreciation of recent weeks is unlikely to simply continue.

A Modest Q4 Strengthening in Store

For the fourth quarter, the institutions surveyed all lean toward the view that the yuan still has a basis to strengthen, though the pace of appreciation may change in stages.

Li Liuyang expects the RMB to stay relatively resilient in October despite a strong dollar, but with a slower pace of appreciation and greater two-way volatility. On one hand, US economic performance and elevated oil prices still support the dollar; on the other, more favorable FX supply-demand conditions, expectations of stable China-US ties, and policy guidance toward steady operation of the exchange rate should ease external pressure on the yuan.

Looking at the central parity rate, Li noted that its appreciation accelerated before the leaders' meeting and was adjusted slightly weaker during the meeting as the dollar rebounded, but by a smaller margin than model-implied levels. This, he believes, reflects a policy stance that avoids both a marked weakening of the RMB with the dollar's rebound and the self-reinforcement of one-way appreciation expectations. During the National Day holiday in early October, the onshore FX market will be closed, and the offshore yuan will be influenced more by offshore dollar swings.

Cai's Q4 view is that the trade surplus, settlement demand and a relatively stable policy environment will continue to support the RMB, but with the China-US rate spread widening, the yuan is more likely to show a combination of slow appreciation and two-way fluctuations.

Pan expects the yuan's Q4 path to show clear stage differences: in October, a phase of dollar strength and Fed hike expectations will still be a disturbance, and appreciation will be relatively gradual; toward year-end, seasonal corporate settlement demand should add momentum. He forecasts an onshore USD/CNY core range of 6.65 to 6.75 in the fourth quarter.

Export performance remains a key clue for tracking the yuan. Pan believes resilient global demand should keep supporting Chinese exports, but changes in trade policy, a slower rise in export prices and high base effects for some AI-industry products could add marginal pressure. These factors may slow export momentum but are not enough to change the support that exports provide for the RMB.

(Source: Xinhua Finance)