Zhang Yu: The flexibility of short-term fluctuations in the RMB exchange rate is gradually opening up, and the core in the medium term is economic fundamentals and the US dollar. | dinasti168 slot
Zhang Yu: 7.3, what happens next?
Yi Yuzhong’s
Core viewpoints
1. Short-term dimension: First, The deviation between the current exchange rate price and the theoretical pricing is low, and it is a normal fluctuation within a reasonable pricing range. Second, the three aspects of the exchange rate (fundamental aspects of foreign exchange settlement and sales, expectations, and transactions) have not overlapped and weakened in the same direction. At the same time, the central bank’s intention to guide exchange rate stability is still relatively clear (the significance of the countercyclical factor shadow variable captured by the Huachuang macro exchange rate model has not declined since the interest rate cut), which may mean that short-term exchange rate trends will be biased towards policy guidance. Third, the unexpected interest rate cut on August 15 points to the central bank’s short-term focus on China as the main focus and exchange rate flexibility. To sum up, we believe that the elasticity of short-term exchange rate fluctuations may gradually open up after the interest rate cut, but the key integer may have a historical pattern of repeatedly pulling down speculation, and the overall exchange rate trend is controllable. Therefore, the specific extent of the elastic space depends on observing the intention and intensity of the policy. We judge that 7.5 is the limit.
2. Medium-term dimension,The key to whether the exchange rate can achieve endogenous stability lies in economic fundamentals and the US dollar. Internally, the Huachuang Macroeconomic Weekly WEI Index shows that the economy is reaching the bottom, the economic rebound in the second quarter has basically ended, and the PMI has bottomed out (the manufacturing PMI in July rebounded to 49.3% for the second consecutive month); externally, the U.S. interest rate hike is coming to an end, and the U.S. dollar is at the end of its strength (annual perspective). From both internal and external perspectives, the exchange rate has a strong foundation for endogenous stability in the medium term.
Report Summary
1. How to evaluate the current valuation of the exchange rate?
Compared with the value center of the RMB exchange rate itself, the current deviation in RMB pricing is not large. Whether looking at a single exchange rate or a basket of exchange rates, the difference between price and value is maintained within 3.7%It is basically a matching state, and the exchange rate is not significantly overvalued or undervalued. In the past, when the pressure for RMB depreciation was high, such as before the 811 exchange reform in 2015, the relative price deviation could reach more than 10%.
2. What is the current “four sides” situation of the exchange rate?
Examine the “four sides” of exchange rates—fundamentals, expectations, transactions, and policies, and grasp the nature of medium-term fluctuations in exchange rates. If the three sides of the market (fundamentals, expectations, and transactions) overlap in the same direction, the exchange rate trend in this case will be the strongest. Even if the policy has regulatory and guidance intentions, market rules must be respected. If the three sides of the market do not superimpose in the same direction, the exchange rate trend will tend to be weak, and a slight increase in policy pressure may trigger rapid exchange rate fluctuations.
CurrentlyJudging from the view,Although the fundamentals of foreign exchange settlement and sales and the expectations of residents and enterprises have weakened marginally due to the impact of economic pressure, they have not yet shown signs of continued significant weakness like the sharp exchange rate depreciation period in 2015-16. At the same time, the trading side is still stable.
3. Judgment of the future of the exchange rate: Short-term fluctuation flexibility is gradually opened, and the core in the medium term is economic fundamentals and the US dollar
The second point of superposition is that the three aspects of the exchange rate (fundamental aspects of foreign exchange settlement and sales, expectations, and transactions) have not overlapped and continued to weaken in the same direction. At the same time, the central bank’s intention to guide exchange rate stability is still relatively clear, which may mean that short-term exchange rate trends will be biased towards policy guidance. Third, the unexpected interest rate cut on August 15 points to the central bank’s short-term focus on China as the main focus and exchange rate flexibility. To sum up, we believe that the elasticity of short-term exchange rate fluctuations may gradually open up after the interest rate cut, but there may be a historical pattern of repeated pulls at key integer numbers to reduce speculation. The overall exchange rate trend is controllable. Therefore, how much flexibility space is specific? The focus is to observe the intention and intensity of the policy. We judge that 7.5 is the limit.
2. In the medium term, the key to whether the exchange rate can achieve endogenous stability lies in economic fundamentals and the US dollar. Consider three factors: First, looking back, the deviation in exchange rate pricing is not high, and there is no directional backlog of pressure.
Secondly, looking at the current situation, although the fundamentals and expectations of exchange rate settlement and sales are marginally weakening, the trading side is still stable. The "three sides" of the exchange rate have not weakened in the same direction, and the central bank still intends to guide the exchange rate. The stable exchange rate may mean that, on the one hand, in the short term, the exchange rate trend may be dominated by policy guidance; on the other hand, the "four aspects" (fundamentals, expectations, transactions, and policies) are not superimposed in the same direction, pointing to the fact that the exchange rate may not have the basis for unilateral sustained depreciation.
Finally, looking forward, Exchange rates have both internal and external factors. Internally speaking, Huachuang Macro Weekly WEI Index shows that the economy has bottomed out, the economic rebound in the second quarter has basically ended, and the PMI has bottomed out (the manufacturing PMI in July rebounded to 49.3% for the second consecutive month); Externally speaking, this round of U.S. dollar interest rate hike cycles may have ended (for details, see "Three Signs to Stop Raising Interest Rates Have Appeared"), and the U.S. dollar is at the end of its strength (annual perspective). From an internal and external perspective, the exchange rate has a strong foundation for endogenous stability in the medium term.
Risk Warning: The Fed’s policy exceeded expectations, and the policy to stabilize growth exceeded expectations
Report Contents
Text of the report
1. How to evaluate the current valuation of the exchange rate?
Compared with the value center of the RMB exchange rate itself? In other words, the current deviation in RMB pricing is not large. Whether looking at a single exchange rate or a basket of exchange rates, the difference between price and value is maintained within 3.7%. It is basically a matching state, and the exchange rate is not significantly overvalued or undervalued. In the past, when the pressure for RMB depreciation was high, such as before the 811 exchange rate reform in 2015, the deviation between price and value could reach 10%. % or more. The theoretical absolute value of the exchange rate is difficult to evaluate. It can only be observed from the side by selecting anchors with better interpretation according to the multi-year operating rules. (1) USDCNYSingle exchange rate perspective
The long-term nominal interest rate contains key information on monetary policy, economy and inflation. Historically, the long-term correspondence between the interest rate difference between China and the U.S. 10Y Treasury bonds and the exchange rate has been relatively good. By regressing the interest rate difference and the RMB central parity rate (1-month moving average) from January 2011 to February 2019, we can get:
The central parity rate of the US dollar against the RMB (MA30) = -0.37The interest rate difference between China and the United States (MA30) + 6.89, adjusted R Square=0.39
(However, there has been a period of divergence since February 2019, mainly due to Sino-US trade friction)
On August 22, the Sino-US interest rate spread dropped to -178bps, and the one-month moving average used in the model was -154bps , the corresponding theoretical pricing of the interest rate difference should be 7.4657, and the actual value of the central parity rate of RMB against the US dollar on August 22nd is 7.1992, which is reasonable compared with the interest rate difference. The pricing overvalued by about 3.7%In the past, when the RMB exchange rate fluctuated greatly, the relative price value could deviate by more than 10%(for example, from March to April 2020, the RMB central parity rate exceeded the interest rate differential). We generally believe that deviations within 5% are price fluctuations within a relatively reasonable pricing range.
(2) CFETSBasket exchange rate perspective
Since the CFETS index is essentially an export-weighted index, it has a good relationship with the export share. In 2015, the strengthening of the basket was inversely related to export competitiveness, because at that time the CFETS anchor dollar passively appreciated against a basket of currencies, while the share of exports fell all the way; the current strengthening of the basket is in the same direction as export competitiveness, reflecting that the exchange rate after exchange reform is based on the result of supply and demand transactions, and the increase in export share supports the strengthening of CFETS. Therefore, my country’s export share is used to fit the CFETS index.
In May, my country’s exports accounted for about 20.5% of the world’s 23 major economies. According to the seasonally adjusted return of export share and CFETS index, the corresponding CFETS index should be about 99.3. The actual value of CFETS in May was about 98.87 (about 0.5% oversold than the theoretical share price). The actual CFETS value on August 23 was 97.13 (about 2.2% lower than the theoretical share value). In the past, when a basket of exchange rates accumulated significant depreciation/appreciation pressure, CFETScould be overpriced/overpriced by 10%
2. What is the current situation of the "four sides" of the exchange rate?
Inspect the "four aspects" of the exchange rate - fundamentals, expectations, transactions and policies, and grasp the nature of medium-term fluctuations in the exchange rate. If the three sides of the market (fundamentals, expectations, and transactions) are superimposed (for example, after the August 11 exchange rate reform, the fundamentals of capital outflows, strong depreciation expectations, and strong inertia of transaction depreciation), the exchange rate trend in this situation is the strongest and is often difficult to reverse quickly. Even if the policy side has the intention of regulation and guidance, market rules must be respected. If the three sides of the market are not superimposed in the same direction, the exchange rate trend will tend to be weak. A slight increase in policy pressure may cause the exchange rate to switch between upward and downward trends quickly, and the exchange rate trend will be biased towards the policy-guided market.
At present, Although the fundamentals of foreign exchange settlement and sales and the expectations of residents and enterprises have weakened marginally due to the impact of economic pressure, they have not yet shown signs of continued substantial weakness like the sharp depreciation of the exchange rate in 2015-16. , at the same time, the trading side is still stable, and the three sides have not superimposed and weakened in the same direction. On the current policy side, the central bank’s intention to guide exchange rate stability is still relatively clear (the significance of the countercyclical factor shadow variable captured by the Huachuang macro exchange rate model has not declined since the interest rate cut), which may mean, on the one hand, in the short term, the exchange rate trend may still be dominated by policy guidance; on the other hand, the "four aspects" (fundamentals, expectations, transactions, policy) have not weakened in the same direction, pointing to the fact that the exchange rate may not have the basis for unilateral sustained depreciation.
(1) Fundamentals: The balance of foreign exchange settlement and sales by banks on behalf of customers changes from forward to reverse
Fundamentals refers to the fundamentals of foreign exchange settlement and sales, cross-border capital flows, foreign exchange reserves and other situations that are truly "quantitative" in nature. Faster cross-border capital inflows and higher settlement rates for current account or capital financial account items will bring stronger exchange rate fundamentals.
Current Situation:The fundamentals of foreign exchange settlement and sales have weakened at the margin, but there are no signs of continued significant weakness as seen during the period of sharp exchange rate depreciation in2015-16. In July, the balance of foreign exchange settlement and sales by banks on behalf of customers was -USD 5.84 billion. In June, it was a surplus of USD 12.53 billion. In the past five years, the average balance of foreign exchange settlement and sales in July was USD 4.59 billion. From 2015 to 2016, the average monthly balance of foreign exchange settlement and sales by banks on behalf of customers was -USD 34.74 billion.
(2) Expectation aspect: Residents and corporate exchange rate expectations are expected to weaken marginally
In the resident sector, the gold implicit exchange rate is used to measure residents' depreciation expectations. When expectations of RMB depreciation increase and foreign exchange controls tighten, residents will increase their gold purchases to hedge risks, causing the onshore gold spot price to be higher than the international gold spot price, which means that the implied exchange rate of gold will be higher than the actual exchange rate.
In the corporate sector, the company’s export settlement rate and import payment exchange rate are used to measure the company’s depreciation expectations. If depreciation expectations are strong, companies will tend to reduce the amount of U.S. dollars received for exports, and the export settlement rate will decrease. At the same time, they will increase the U.S. dollar exchange payments required for imports, and the import payment exchange rate will increase, which will ultimately lead to a decrease in the net settlement exchange rate (export settlement rate - import payment exchange rate).
Current Situation: First, the expectation of depreciation in the residential sector is rising. Recent gold implied exchange rate fluctuations have been rising rapidly. On August 18, the implied exchange rate of gold was 7.63, which was 4311 pips higher than the actual value of the RMB central parity of 7.2 on that day. This may reflect certain fluctuations in the exchange rate expectations of the residents' sector and a marginal strengthening of depreciation expectations.
Second, the exchange rate expectations of the corporate sector have weakened at the margin, but there are currently no signs of continued strengthening as before the 811 exchange rate reform (the export settlement rate fell rapidly and the import payment rate increased significantly). enterpriseSector depreciation expectations are related to the PMI. The PMI stabilized in June, and there are actually preliminary signs of recovery in the corporate net exchange rate. However, in July, the corporate export settlement rate dropped from the previous value of 59.9% to 51.5%, driving the net exchange rate to drop to -20.4% (-10.8% in June), which may reflect the marginal weakening tendency of corporate exchange rate expectations under economic pressure.
(3) Trading surface: Onshore spot trading volume fluctuates within a normal range, and the trading surface is still stable
From the perspective of spot trading volume,The shrinking onshore spot trading volume means that offshore trading has an increasing marginal impact on the RMB exchange rate. Compared with onshore trading, offshore trading is more likely to be highly speculative and may increase exchange rate fluctuations. For example, the rapid depreciation of the RMB from April 19 to mid-May 2022 was mainly affected by offshore transactions. At that time, Shanghai (the financial center) was affected by the epidemic, which caused the onshore RMB spot trading volume to shrink. The average daily spot trading volume dropped from about US$37 billion in 2021 to less than US$20 billion in April 2022, which brought about a marginal increase in the influence of offshore transactions.
Current situation:USDCNY’s onshore spot inquiry daily trading volume is about 30 billion to 40 billion U.S. dollars, which is marginally lower than the previous daily trading volume of nearly 50 billion U.S. dollars, and fluctuates in a normal range. This may reflect that depreciation has not promoted a large number of transactions betting on depreciation, and the trading surface is still relatively stable.
(4) Policy aspect: The shadow of countercyclical factors captured by the Huachuang macro exchange rate model continues to be significant
The central bank does not announce the countercyclical factor. We try to capture the trend of the countercyclical factor with the model fitting results. When the estimated value of the countercyclical factor fitted by the model (which can also be called the shadow variable of the countercyclical factor) fluctuates greatly in a single direction, it means that the probability of the central bank using the countercyclical factor may be higher.
Current situation: June 26Since then, the shadow of the countercyclical factor captured by our exchange rate model has continued to be below -100bps, which is relatively significant. It may reflect that the central bank continues to regulate the flexibility of the exchange rate and guide exchange rate stability. In addition, Since the interest rate cut on August 15, the significance of the countercyclical factor shadow we captured has not declined, which may indicate that the policy still intends to guide exchange rate stability.
3. Judgment of the future of exchange rate: The flexibility of short-term fluctuations is gradually opened, and the core of the medium-term is the economic fundamentals. This aspect
1Three levels should be considered. First, the deviation between the current exchange rate price and the theoretical pricing is relatively low, which is a normal fluctuation within a reasonable pricing range. Second, the three aspects of the exchange rate (fundamentals of foreign exchange settlement and sales, expectations, and transactions) have not weakened in the same direction. At the same time, the central bank’s intention to guide exchange rate stability is still relatively clear (the significance of the countercyclical factor shadow variable captured by the Huachuang macro exchange rate model has not declined since the interest rate cut), which may mean that short-term exchange rate trends will be biased towards policy guidance. Third, the unexpected interest rate cut on August 15 pointed to the central bank’s short-term focus on China as the main focus and exchange rate flexibility. To sum up, we believe that the elasticity of short-term exchange rate fluctuations may gradually open up after the interest rate cut, but there may be a historical pattern of repeated pulls at key integer numbers to reduce speculation. The overall exchange rate trend is controllable. Therefore, how much flexibility space is specific? The focus is to observe the intention and intensity of the policy. We judge that 7.5 is the limit.
In the medium term, the key to whether the exchange rate can achieve endogenous stability lies in economic fundamentals and the US dollar. Consider three factors:
First of all, looking back, the deviation in exchange rate pricing is not high, and there is no directional backlog of pressure.
Secondly, looking at the current situation,Although the fundamentals and expectations of exchange rate settlement and sales are marginally weakening, the transaction side is still stable. The "three sides" of the exchange rate have not superimposed and weakened in the same direction. The central bank still intends to guide the stability of the exchange rate on the superimposed policy side. This may mean that, on the one hand, in the short term, the exchange rate trend may still be dominated by policy-guided market; on the other hand, the "four sides" have not superimposed and weakened in the same direction, pointing to the fact that the exchange rate may not have the basis for unilateral sustained depreciation.
Finally, looking forward, the exchange rate has both external and internal factors. Internal factors determine the direction, and external factors determine the range. Internally, Huachuang Macro Weekly WEI Index shows that the economy has bottomed out (it has rebounded for four consecutive weeks starting from the week of July 30). The economic rebound in the second quarter has basically ended, and the PMI has bottomed out (the manufacturing industry in July PMI rebounded to 49.3% for the second consecutive month); From an external perspective, this cycle of U.S. dollar interest rate hikes may have ended (see "Three Signals to Stop Raising Interest Rates Have Appeared" for details), and the U.S. dollar is at the end of its strength (annual perspective). From both internal and external perspectives, the exchange rate has a strong foundation for endogenous stability in the medium term.
