Fed hikes could pile pressure on FX, but China’s positives will absorb shocks

As the U.S. Federal Reserve continues to tighten monetary policy sharply, major global currencies including the Chinese yuan are under downward pressure, but excessive concern over renminbi depreciation is unwarranted given strong economic fundamentals. of China and its 3,000 billion dollars in foreign currency. reservations, experts said Thursday.

The Fed on Wednesday raised its benchmark interest rates by 0.75 percentage points, the third straight hike of the same magnitude so far this year. The federal funds rate in the United States is thus up by around 3% to 3.25%, the highest since the beginning of 2008.

The U.S. dollar index hit a 20-year high of 111.73 shortly after the Fed’s announcement on Wednesday.

A stronger US dollar caused other currencies to decline. As the RMB spot rate against the greenback opened 266 basis points lower on Thursday, offshore USD/CNY quickly fell in morning trade below 7.1, the lowest level since June. 2020.

The British pound fell to its lowest level in 37 years against the US dollar on Thursday. The euro fell to its lowest since October 2002 and the Australian dollar hit its lowest since May 2020.

Jiang Qijia, principal analyst at Noah Holdings Ltd, a Shanghai-based financial services provider, admitted that the RMB is likely to still face some depreciation pressure against the US dollar over the next one to two months. “But it’s not far from the bottom.”

Although the RMB has depreciated 9.88% against the US dollar so far this year, the People’s Bank of China, the country’s central bank, said on Friday that the RMB exchange rate has remained stable in a rational range, and that the two-way fluctuation of the currency is “normal”.

Wen Bin, chief economist at China Minsheng Banking Corp, said China’s GDP will rebound significantly in the third quarter with subdued and controllable inflation. High current account, direct investment and trade surpluses have laid the foundation for a stable RMB and the currency market in general. “There is no reason to continue the depreciation of the RMB.”

China’s $3 trillion in foreign exchange reserves should also help allay any concerns about large foreign capital outflows, said Cheng Hao, fixed income analyst at Fidelity International.

More importantly, the world will increasingly recognize the value of using RMB in various transactions, said Liu Guoqiang, vice governor of the PBOC, at a press conference on September 5.

Data released Thursday by global financial messaging service provider Society for Worldwide Interbank Financial Telecommunication showed the RMB accounted for 2.31% of global payments in August, a reading that was 2.2% a month earlier.

Israel’s central bank announced in late April that it will include the Chinese yuan in its foreign exchange reserves for the first time. Russia, Brazil, Switzerland, Mexico, Chile and South Africa have taken similar steps to increase the RMB content of their respective foreign exchange reserves.

Meanwhile, the share of US dollar reserves held by central banks fell to 58.8% in July, its lowest level in 25 years, according to the International Monetary Fund’s survey of the currency composition of reserves. exchange official – COFER.

The United States faces more challenges, said Cui Rong, chief macro economist for overseas markets at CITIC Securities. The Fed may only be able to rein in inflation at the cost of an economic regression, which is likely to take place substantially in the second half of 2023.

The US stock market has yet to bottom. The 10-year US Treasury yield will fluctuate in the short term and decline in the medium to long term, she said.

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