RMB Spot Rate Gains Over 4% Against the Dollar in First Three Quarters; What Lies Ahead?

In the first three quarters of this year, the RMB central parity rate and spot rate against the US dollar appreciated by nearly 4.18% and 4.06% respectively.

On the last trading day of September, the RMB spot rate against the dollar closed at 6.7053 at 16:30, down 16 pips from the previous trading day. In the third quarter, the RMB spot rate against the dollar appreciated by nearly 1.18% in cumulative terms.

In the first nine months of this year, the RMB spot rate against the dollar gained 2,837 basis points in cumulative terms, an appreciation of 4.06%.

On the central parity side, the RMB central parity rate against the dollar was raised by 60 basis points to 6.7351 on September 30. In the first three quarters, the RMB central parity rate against the dollar appreciated by nearly 4.18% cumulatively.

Huatai Securities noted that China-US government bond yields have continued to diverge this year, yet the RMB has generally trended firmer against the dollar. The first driver is strong external demand and relatively soft domestic demand, which have generated a large trade surplus and FX settlement demand. In the first eight months, banks' FX settlement surplus on behalf of clients reached 397.6 billion US dollars, far exceeding the whole of last year. The second driver is capital account flows. On one hand, the macroprudential management framework for cross-border capital flows has not loosened appreciably, keeping capital outflow pressure muted; on the other hand, driven by factors such as standardized tax administration, some previously parked offshore funds returned in stages, marginally increasing dollar supply in the FX market. Finally, the external environment has also created a favorable backdrop for RMB appreciation: de-dollarization trades flared up intermittently, non-US countries are actively pushing reserve diversification, and RMB internationalization continues to advance.

CICC noted in a research report that looking ahead to October, the dollar is expected to fluctuate at elevated levels while the RMB holds its resilience on the back of export and settlement supply, trading in two-way moves around 6.70 (October forecast range of 6.64-6.78, with a midpoint of 6.71). The PBOC's September 29 announcement of adjustments to several monetary policy tools is unlikely to change the RMB's existing trend. Before the dollar clearly turns weaker, conditions for an accelerated RMB appreciation are not yet sufficient. In summary, the policy did not broadly widen the China-US interest rate spread, and its direct impact on the exchange rate is limited; the focus of exchange rate policy is to stabilize expectations and smooth volatility, rather than to block a fundamentally supported RMB appreciation. The monthly view is therefore maintained that the RMB will stay resilient, with appreciation moderating and two-way volatility increasing.

Changjiang Securities noted that, from a policy perspective, the current focus of exchange rate policy is on stabilizing expectations and smoothing volatility rather than changing market direction. In the short term, referencing export growth and the magnitude of the previous two appreciation rounds, the potential appreciation level for the offshore RMB in this round may be 6.5-6.6. Over the medium and long term, the weak-dollar narrative and the RMB internationalization process should continue to support RMB appreciation.

(Source: The Paper)