How to view the RMB exchange rate in 2025?

Wallstreetcn
2025.01.27 09:20
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Recently, the RMB exchange rate has rebounded, influenced by the weakening of the US dollar index and the central bank's stable exchange rate policy. In the short term, attention should be paid to Trump's policies and the signals from the Federal Reserve's January meeting, as volatility in the foreign exchange market may increase. For the whole year, the high level of the US dollar index and the risk of increased tariffs on China are the main factors, but Sino-US economic and trade consultations may ease market sentiment and support the performance of the RMB. The central bank's determination to stabilize the exchange rate is strong, and it is expected that policies will continue to be intensified, which will be an important variable affecting the RMB exchange rate

Recently, with the weakening of the US dollar index and the central bank's multiple measures to stabilize the exchange rate, the RMB exchange rate has rebounded. In the short term, attention needs to be paid to the implementation of policies after Trump's inauguration and the signals released by the Federal Reserve's January interest rate meeting, as fluctuations in the foreign exchange market are expected to increase. Looking ahead to the year, the US dollar index may maintain a high center, and potential external disturbances such as the US imposing additional tariffs on China may pose the biggest risk factors for the RMB exchange rate.

However, there may also be discrepancies in expectations, such as the extent and pace of the US imposing additional tariffs on China being less than expected, or the US and China actively engaging in economic and trade consultations to effectively ease market sentiment, which may provide temporary support for the RMB exchange rate. In addition, the central bank's determination to stabilize the exchange rate is expected to be strong, and relevant policies are likely to continue to be intensified.

External Pressure on RMB Exchange Rate Temporarily Eases

The inflation structure in the US improved in December 2024, alleviating market concerns about inflation stickiness. Although it cannot change the market's consensus expectation for the Federal Reserve to pause interest rate cuts in January 2025, it has somewhat strengthened the market's expectation for interest rate cuts throughout 2025.

Moreover, Trump's inaugural speech focused more on domestic issues and did not mention tariff policies extensively, leading investors to abandon the extreme pessimistic expectation that Trump would immediately impose additional tariffs globally, especially on China.

Market risk appetite has rebounded, and the previous excessive rush of various assets towards the "Trump trade" has also experienced a reversal, causing the US dollar index to decline further. Looking ahead, external disturbances may be the biggest risk factors for the RMB exchange rate, including a strong dollar and the potential risk of the US imposing additional tariffs on China.

There may also be discrepancies in expectations, such as the extent and pace of the US imposing additional tariffs on China being less than expected, or the US and China actively engaging in economic and trade consultations to effectively ease market sentiment, which may provide temporary support for the RMB exchange rate.

Central Bank's Strong Exchange Rate Stabilization Policy

Recently, the central bank has taken multiple measures to stabilize the exchange rate, and the intensity of the central bank's exchange rate policy is expected to remain one of the important variables affecting the RMB exchange rate:

  1. The stability of the RMB central parity rate is significantly stronger than that of the offshore spot exchange rate. As we enter 2025, the average price difference between the central bank's USD to RMB central parity quote and Bloomberg's expected price has further risen to about 1345 pips, indicating a strong signal from the central bank to stabilize the exchange rate.

  2. On January 15, the central bank issued 60 billion yuan of offshore central bank bills in the Hong Kong market. This issuance not only set a new high for a single issuance scale but also involved new issuance rather than renewal, which helps to recover liquidity in the offshore market and stabilize expectations for the RMB exchange rate.

  3. Recently, the central bank and the State Administration of Foreign Exchange raised the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions to 1.75. Combined with historical data and the actual effects of this adjustment, this operation is more about releasing a strong signal to stabilize the exchange rate.

  4. Against the backdrop of a renewed increase in foreign exchange forward basis, foreign institutions have re-increased their holdings of RMB bond assets in December 2024. It is expected that the RMB forward basis will maintain a certain level, which may drive foreign capital to further increase their holdings of RMB bond assets, mainly in interbank certificates of deposit, thereby forming foreign capital inflows in the bond market and supporting the RMB exchange rate

Summary and Outlook:

In the short term, attention needs to be paid to the implementation of policies after Trump's inauguration and the signals released by the Federal Reserve's January interest rate meeting. It is expected that volatility in the foreign exchange market may increase, and under the backdrop of the central bank maintaining a strong exchange rate stability policy, the RMB exchange rate is likely to fluctuate around 7.3 in the short term. Looking ahead to the whole year, the US dollar index may maintain a high center, and potential external disturbances such as the US imposing additional tariffs on China could be the biggest risk factors for the RMB exchange rate.

However, there may also be discrepancies in expectations, such as the extent and pace of the US imposing additional tariffs on China being less than expected, or the US and China actively engaging in economic and trade consultations to effectively ease market sentiment, which may provide temporary support for the performance of the RMB exchange rate.

In addition, internal factors are still expected to support the RMB exchange rate: first, considering the pressure from direct investment accounts and securities investment accounts, it is expected that the central bank's determination to stabilize the exchange rate is strong, and relevant policies are likely to continue to be intensified; second, domestic operations such as reserve requirement ratio cuts and interest rate reductions may work together with other incremental policies to assist in the recovery of the fundamentals.

Authors of this article: Mingming (S1010517100001), Yu Jingwei, Qin Chuyuan, Zhou Yunfeng, Source: CITIC Securities Research, Original Title: "Bond Market Enlightenment | Foreign Exchange Market Focus: How to View the RMB Exchange Rate Under the 'Trump Trade' Reversal?"

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