Multiple Factors Support the Expectation of a Stronger RMB Against the USD Within the Year
While market attention remains focused on the stock market, the foreign exchange market has also seen new developments after a prolonged period of calm. Over the past two weeks, the RMB has continued to strengthen against the USD, with the offshore RMB exchange rate briefly breaking through 7.12. The strengthening spot rate has also driven continuous upward adjustments in the RMB central parity, reaching a nearly 10-month high.
The main drivers behind the recent strengthening of the RMB against the USD include the fluctuating weakness of the US dollar index and the narrowing China-US interest rate spread amid expectations of a Fed rate cut. Recent dovish remarks by Fed Chair Jerome Powell have预热 expectations for a September rate cut, leading to a weaker US dollar index and lower US Treasury yields, which in turn support non-US currencies, including the RMB.
From a medium-term perspective, factors supporting a stronger RMB exchange rate are accumulating through the end of the year. On the supply and demand front, although seasonal increases in foreign exchange purchases due to corporate mid-year dividend payments theoretically exert some downward pressure on the RMB, actual data shows that the exchange rate remained stable in June and July. In July, the settlement rate for enterprises and individuals even increased slightly month-on-month, and foreign exchange settlement and sales continued to show a surplus, indicating stable market expectations. After September, demand for dividend-related foreign exchange purchases is expected to decline significantly, and the fourth quarter will see a peak in foreign exchange settlements, both of which will help maintain a stronger RMB.
In addition to these seasonal changes in foreign exchange settlement and sales, the Fed’s restart of rate cuts and the influx of international capital into non-US markets will also alter supply and demand dynamics in the foreign exchange market. A recent Goldman Sachs research report noted that the focus of Asian bond investors has shifted significantly over the past six months, with "de-dollarization" becoming a much more prominent theme. Investors are continuing to diversify their investments away from USD assets. Not only the bond market but also the strong performance of emerging stock markets this year is linked to adjustments in international capital allocation. As international capital continues to increase allocations to RMB assets, the securities and foreign exchange markets are expected to form a mutually reinforcing positive feedback loop.
Foreign exchange forward prices often reflect market expectations for future exchange rate movements. Since August, while the spot RMB exchange rate has shown fluctuating strength, the three-month and four-month forward prices have moved in tandem, indicating market optimism about the RMB’s strength against the USD through the end of the year. The central bank’s exchange rate policy remains consistent. Adhering to the principle of letting the market play a decisive role in exchange rate formation while maintaining底线思维, it is foreseeable that the RMB exchange rate against the USD will continue to exhibit fluctuating strength in the near future. This will further enhance the international attractiveness of RMB assets, including capital markets.
