Author: Zhou Erin

　　The U.S. dollar index is trending like a broken bamboo. After a lapse of more than a month, it once again broke through the nearly 20-year high of 109 on August 23.

After the unexpected rate cut last week, the yuan, which has been sideways for a long time, also fell below the 6.8 resistance level and moved towards the 6.9 mark.

　　As of 19:10 on August 23, Beijing time, USD/CNH was at 6.8628, and USD/CNY was at 6.8510, down 126 points from the official closing price of the previous trading day and down 33 points from the closing price of the previous day and night.

Since the central bank cut the MLF (Medium-Term Lending Facility) interest rate last Monday, the RMB has depreciated rapidly against the US dollar. On the 22nd, after the LPR (Loan Market Quote Rate) followed the cut, the RMB further depreciated.

Previously, on August 15, the offshore RMB fell by nearly 700 points, approaching 6.82, the largest drop since the outbreak of the epidemic (March 2020).

　　At present, the strong U.S. dollar does not seem to be on the verge of stalling. G10 currencies such as the euro, the pound, the Japanese yen, and the Australian dollar are all depreciating against the U.S. dollar, which also makes the U.S. dollar index stand out.

In this environment, where will the RMB go in the future?

　　Yuan under pressure after rate cut

　　On August 23, a foreign exchange trader from a major state-owned bank told reporters that the depreciation was mainly due to the impact of interest rate cuts and social financing and other economic data.

"The depreciation of the offshore renminbi is greater, and the pressure of overseas depreciation is more transactional, while the domestic demand is more. After the devaluation of the renminbi, the amount of foreign exchange settlement is not small."

　　First Financial reported at the beginning of last week that some foreign exchange traders said that the pressure of the strong dollar is still there, the domestic liquidity is abnormally loose, the recent economic data is relatively weak, and the pressure of RMB depreciation exists objectively.

However, if the foreign trade data can still maintain the strong trend before July in the future, it may be able to hedge this part of the overvaluation and continue to trade sideways near the current point.

According to the reporter's understanding, most foreign banks' forecasts for the year-end point of USD/RMB are between 6.7 and 6.95.

　　As far as the fourth quarter is concerned, it is widely expected that there will be some pressure on the RMB.

Wu Zhaoyin, director of macro strategy of AVIC Trust, told reporters earlier that from the perspective of global inflation, the economic situation of major economies and other indicators, the upward trend of the US dollar has not ended, and the corresponding asset prices, including stocks, commodities, and the RMB exchange rate, are all under pressure.

　　In fact, since the third quarter, the RMB has been trading sideways in the 6.7 range against the US dollar for a long time.

Until August 12, data released on the evening showed that China's credit and social financing growth in July decreased by 401 billion yuan and 319.1 billion yuan respectively, reflecting that the current financing demand is still weak.

The growth rate of social zero was 2.7%, the growth rate of fixed asset investment was 5.7%, and the growth rate of real estate investment continued to decline to -6.4%. After the epidemic eased, the recovery of domestic demand was not obvious.

　　At that time, USD/CNH depreciated from 6.7225 to around 6.7445.

In response to the data, on August 15, the MLF and reverse repurchase rates were both lowered by 10BP, and the yields of China's 10-year treasury bonds and CDB bonds were greatly regulated and lowered. USD/CNH jumped to around 6.8163 in an instant, with a depreciation rate as high as Nearly 700 points, this is a long-lost breakthrough after the recent sideways trading.

Traders reacted quite a bit to this unexpected move, considering that a radical "wave of interest rate hikes" is being set off overseas, and that interest rate cuts were not considered an option that China's central bank might consider earlier.

　　With the MLF cut, the LPR this Monday was also cut as expected, and the 5-year LPR, which is more related to housing loans, was cut sharply by 15BP, which seemed to further lead to the depreciation of the renminbi.

　　HSBC has recently raised its USD/CNY forecast, which currently sees the USD/CNY exchange rate reaching 6.9 by the end of 2022 and 6.95 by mid-2023.

"The USD/CNY has recently broken through the closely watched 6.8 mark, which we believe means USD/CNY will be in a new higher range, such as 6.75-7.00, for the rest of this year and the first half of next year," the agency said.

　　But HSBC also believes that stable yield differentials and fairer valuations suggest this round of renminbi depreciation will be milder than in the second quarter.

China's economic growth remains on track for a gradual recovery in the second half of 2022, with the economy unlikely to contract again as sharply as in the second quarter as aggressive fiscal stimulus and prudent monetary easing take effect.

　　Barclays told reporters that the trend of the yuan depends on changes in exports.

It is currently expected that the USD/CNY will be at 6.9 in the third quarter and may return to 6.8 by the end of the year.

　　The data shows that China's trade surplus in May reached 78.75 billion US dollars, the June trade surplus was as high as 97.9 billion US dollars, and the July trade surplus reached 101.3 billion US dollars. This is the first time that my country's monthly surplus has exceeded 100 billion US dollars since records began. .

　　Xie Yunliang, chief macro analyst at Cinda Securities, told reporters that the future trade situation will remain the key to the direction of the RMB.

In this regard, two factors are crucial, one is the change in price factors, and the other is the change in overseas demand.

Over the past period of time, overseas price hikes have also pushed up China's exports.

　　Lu Ting, chief economist of Nomura China, told reporters: "The auto industry, especially electric vehicles, may be one of the very few industries that boosted China's export growth in the second quarter. China's huge auto industry capacity (especially electric vehicles) , having a more complete domestic supply chain and price competitiveness should provide some cushion for China's exports, especially given that passenger car price inflation in advanced economies has been very high over the past year and a half." But he recently It was mentioned that according to the year-on-year changes in the foreign trade throughput of China's eight major ports (data released every 10 days), the data from August 1 to 10 dropped significantly from 29.3% in July 21 to 31 and 14.7% in July to 0.2% .

In fact, the year-on-year increase in export production has slowed to 9.8% in July from 15.1% in June.

　　The strong dollar is difficult to extinguish in the short term

　　The impact of a strong dollar on the RMB cannot be underestimated.

On August 23, the yield on the 10-year U.S. Treasury bond exceeded 3% again overnight, the inversion of the Sino-U.S. interest rate gap widened, and the U.S. dollar index exceeded 109 in one fell swoop on the afternoon of the same day.

As of 19:25 on the 23rd, Beijing time, the US dollar index was at 108.933.

　　Recently, a number of Fed officials said that in order to curb inflation, they will continue to actively raise interest rates in the future, driving the dollar soaring.

Last Thursday, St. Louis Fed President Bullard (JamesBullard) and San Francisco Fed President Dailey (MaryDaly) mentioned the need for further interest rate hikes.

Their comments suggested a third straight 75BP hike in September and Kansas City Fed President Esther George said they would not stop tightening until they were "completely confident" that inflation was coming back down.

　　As the previously announced U.S. CPI in July was lower than expected, triggering market expectations for peak inflation, expectations of a 75BP rate hike in September once cooled to 50BP, which also caused the dollar index to drop below 106.

However, the July CPI reading was still as high as 8.5%.

Recently, a series of hawkish remarks have cooled the rate hike theory.

　　This week, investors focused on the annual meeting of global central banks to be held in Jackson Hole, the United States. The theme of this three-day seminar is "Re-evaluation of economic and policy constraints". Federal Reserve Chairman Powell will be held in Beijing this week. Keynote speech at 10pm on Friday.

The annual meeting has traditionally been seen as an important meeting for Fed officials to signal policy changes.

At present, what investors want to know most is how much the central bank will raise interest rates in the future.

　　Lukman Otunuga, senior research analyst at FXTM, told reporters that the message from this seminar is particularly important when the Fed no longer provides specific forward guidance and formulates monetary policy on a meeting-by-meeting basis.

"Recently, the dollar has broken through a number of key levels in a flash, and the concern is whether the market is already preparing for Powell's tough speech, or is it just because of the summer market, the market is thin and the market is thin. The long-term appreciation trend of the dollar?"

　　Non-US currencies generally weak

　　Weakness of G10 currencies also pushed the US dollar index higher. In the future, how the related currencies change will also indirectly affect the RMB.

　　Among them, the weakening of the euro is undoubtedly the most important. After all, the euro accounts for nearly 60% of the US dollar index.

At 23:00 on August 22, Beijing time, the euro was quoted at 0.9967 against the US dollar, falling below the parity of 1:1 again earlier on the same day.

　　Earlier, the German CPI rose 5.3% month-on-month in July, the largest increase since the statistics began in 1949.

At the same time, the annual rate of increase reached a staggering 37.2%.

While that could increase pressure on the ECB to raise interest rates again in September, it failed to boost the euro as investors became more concerned about the risk of a recession.

　　The energy crisis has almost become the last straw to crush the euro zone.

Economists now expect the probability of a recession in the euro zone to rise to 60% in the next 12 months, up from 45% in a previous survey and much higher than 20% before the Russian-Ukrainian conflict, according to the survey.

Germany, the EU's largest economy, could enter a contraction as soon as this quarter.

European gas prices closed at a record high for the second day in a row on Friday.

Over the weekend, Gazprom announced that it would completely stop supply through the Nord Stream 1 gas pipeline within three days.

　　In addition to the euro, the pound also fell against the dollar.

With inflation rising above 10% in the UK, the Bank of England has warned that the country's economy could slip into a recession in the fourth quarter that could last more than a year.

　　The yen is even weaker. On Monday, USD/JPY rose 0.40% to 136.43. The rise in U.S. bond yields pushed USD/JPY to its highest level since July 28. Best weekly performance since 10.

Inflation in Japan rose 2.6% year-on-year in July, the highest in nearly eight years, and above the Bank of Japan's 2% target for the fourth consecutive month.

　　"Despite rising price pressures, there is absolutely no chance the central bank will raise interest rates or adjust its yield curve control policy (holding the 10-year Treasury yield at 0, hereinafter referred to as 'YCC')." GAIN Capital Group senior analyst Matt Simpson (Matt Simpson) tell reporters.

Bond traders ended up hurt when they tried to get the BOJ to adjust its YCC policy in June, drawing backlash from the central bank's massive bond purchases, while the central bank managed to regain control of the 10-year bond yield.

Inflation is still rising in Japan, but at a weaker level than in other developed countries.

In fact, according to the Bank of Japan's forecast, inflation will peak in the fourth quarter.

So overall, there seems to be little reason to expect the BOJ to urgently adjust rates or YCC policy.

　　In addition, the Australian dollar, which is particularly sensitive to risk sentiment, has also fallen recently. As of 23:00 on August 22, Beijing time, it was reported at 0.6875. The Australian dollar has depreciated nearly 3% against the US dollar in the past week.