USD/CNH forecast: Why is the Chinese renminbi strong and what’s the outlook?
What is RMB currency
Chinese currencies and the way they’re organised may seem confusing at first. The world’s second-largest economy has two separate currencies, CNH and CNY. Only CNH can be traded on international markets outside of China. CNY is used only inside China’s economic and financial system.
RMB currency stands for renminbi, which means “people’s money” in Chinese. RMB is sometimes used to describe either or both CNH and CNY, both of which can be referred to as either the "renminbi" or the "yuan”. The yuan is the basic unit of the renminbi, in much the same way as the British pound is sometimes referred to as ‘pound sterling’.
Latest RMB news
USD/CNH has been unfazed by the whirlwind of negative sentiment about China’s economy. The renminbi is currently one of the strongest currencies on the market (27 October), although some analysts think this strength is unlikely to last much longer.
The RMB was up close to 2% against the US Dollar for October 2021, when measured by the offshore USD/CNH exchange rate, making it one of the year’s strongest currencies.
Of all the emerging market currencies, only the Russian rouble and South African rand have done better than the renminbi. Only the Canadian dollar and Norwegian krone have outperformed the renminbi, when it comes to currencies in advanced economies.
Each of those currencies has benefited significantly from either the commodity price rally or the tailwinds of rising central bank interest rates – but those are not supportive factors for RMB.
“The strength of the Chinese yuan, in our opinion, has been one of the most counterintuitive macro dynamics this year,” said Wee Khoon Chong, a senior APAC markets strategist at BNY Mellon.
Canada’s dollar, Norway’s krone and Russia’s rouble have been helped in 2021 by high commodity prices that bolstered trade surpluses and added to GDP, but the commodity rally has been an issue for China, given that it is a net importer of raw materials and energy.
The rouble and the krone have also benefited from central bank decisions to lift interest rates in Russia and Norway, respectively, but no such developments have been forthcoming in China.
In the meantime, sentiment toward China’s economy has deteriorated after the high profile troubles of China Evergrande Group stoked concerns about the overall real estate market, just as investors were attempting to come to terms with major changes in government economic policy.
This was all before official figures confirmed a further slowdown in the pace of GDP growth in China for the third-quarter.
Renminbi analysis: PBoC exchange rate management
USD/CNH has fallen steadily, and at times RMB value gains has been incongruous with price action elsewhere in the market as well as with developments in China’s economy.
The renminbi’s advance has prompted discussion among analysts after it pushed USD/CNH lower, even as the US dollar strengthened against other currencies in September, reflecting isolated strength in China’s currency.
This strength was more curious due to simultaneous market concerns over the stability of the real estate sector and uncertainty about what the government’s “common prosperity” agenda will mean for economic policy going forward.
Some of the explanations offered for why the Chinese currency may have strengthened point to the involvement of the Peoples’ Bank of China (PBoC), which is responsible for the country’s “managed floating exchange rate regime”.
“In as much as China's fundamentals haven't been screaming ‘Get long of the RMB’ I've done my level best to classify the move in dollar China you described not as a growth and reflationary RMB rally, but more as an FX management RMB rally,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets, in an October podcast.
The managed float regime means that renminbi pairs sometimes reflect the activity of the PBoC in addition to market supply and demand. The system is underwritten and enforced by foreign exchange reserves that were valued at a little over $3.2trn in September.
BMO’s Gallo and colleagues suggest the PBoC may have encouraged the fall in USD/CNH because of a possible preference for avoiding outcomes that might lead the dollar to strengthen by more than it has in recent months.
Dollar strength can be destabilising for emerging market currencies and economies, while uncontrolled rallies in USD/CNH have been known in the past to act as triggers for capital outflows from the Chinese economy.
“This round of the Fed's monetary policy adjustment will not change the pattern of China's basic balance of payments, nor will it change the fundamental stability of the RMB exchange rate,” said Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange (SAFE), in an October 22 press briefing.
Much of the recent dollar strength is connected to pending changes in the Fed’s monetary policy, and could sometimes lead SAFE, a PBoC committee, to “carry out counter-cyclical adjustments in a timely manner to effectively maintain the stability of the foreign exchange market” as was indicated by Wang Chunying in October’s briefing.
Commodity prices could also be at play
While concerns about capital outflows could explain any short-term steering of the currency by the PBoC, others have perceived a slightly different motivation for why the Bank may have wanted a stronger exchange rate against the dollar.
“Against the backdrop of a generally stronger dollar, we consider this a deliberate policy decision by the authorities, which will serve to dampen the inflationary impact of rising energy and commodity prices, and enable China to more easily gain access to the energy and commodity sources it needs at favourable domestic prices,” said Iris Pang, chief economist for Greater China at ING, in an October review of ING forecasts.
Commodities have seen prices rise by triple digit percentages in some cases this year, with Brent crude oil up 65% in October and natural gas has risen more than 300% for supplies to be delivered in December. These goods are priced in dollars.
With the Renminbi having strengthened against the dollar, inflationary commodity price increases have been dampened, although there are also other drivers of the currency beyond the PBoC that could explain its standout performance.
“The surplus in foreign-related transactions closely related to the real economy, such as trade in goods and direct investment, has expanded, bringing more stable cross-border capital inflows,” SAFE’s Wang Chunying said on October 22. “These surpluses, which are closely related to the real economy, are the basis for China’s balance of international payments and an important source of funds for the foreign exchange market.”
Government policy stokes uncertainty
China’s currency and economy face uncertainties associated with the government’s new economic policy agenda to foster what it calls “common prosperity”.
Little about the new agenda has been detailed since the term was used by President Xi Jingping in a speech marking the centenary of the Chinese Communist Party’s founding in July, although it has impacted stock markets and is a major focus for many analysts.
President Jingping said in his speech that the government would be guided by three objectives: to reduce poverty, cut pollution and prevent or otherwise address financial risks in the economy when determining its policy.
The Central Financial and Economic Affairs Committee made clear that reducing poverty and inequality is a key part of the agenda, and will likely entail higher taxes as well as increased welfare spending, according to a Xinhua news agency summary.
“The aim is to grow the economy so that everyone’s income, wealth and opportunities can increase but more equally,” says Kevin Xie, a senior Asia economist at Commonwealth Bank of Australia, in a September research note.
The controversy is not about taxes and spending however, and is instead the result of regulations that have been aimed at some economic sectors.
This is after Chinese authorities issued new guidelines aimed at “further reducing the work burden of students in compulsory education and the burden of off-campus training”.
The guidelines banned private tutoring for profit in core educational subjects in the hope of reducing social and economic pressures on children, but they also decimated the market capitalization of publicly quoted companies operating in the industry.
Recent regulatory actions have cast China as straying from its earlier path toward a free-market form of economic governance, but some see this as necessary reform.
Renminbi forecasts and USD/CNH outlook
While analysts have different ideas about why USD/CNH has been so subdued lately, there is less divergence in the outlook for the renminbi because, with few exceptions, the exchange rate is tipped to rise in the coming months.
One of those few exceptions is Malaysian banking giant UOB, which said in an October research note that USD/CNH is now in a technical downtrend that could remain in place so long as it holds below 6.4650.
“Yesterday (Oct 19), USD/CNH lurched lower and broke September’s low near 6.4230 followed quickly by the bottom of our expected range at 6.4100. The ease and speed by which USD/CNH sliced through the support levels came as a surprise,” said Quek Ser Leang, a strategist at UOB Bank.
“The next support level of note is at June’s low of 6.3510; a break of this level would increase the risk of USD/CNH moving towards 6.2900. On the upside, September’s low of 6.4230 has turned into a solid resistance now but the negative outlook is deemed intact as long the declining trend-line resistance (currently a 6.4650) is not breached.”
“We expect the CNY to stay supported in the near term which should, in turn, see the CNY provide a tailwind for Asia helping currencies to offset worries around the persistent climb in US yields,” said Credit Agricole’s Cheung.
“Given the weakening growth prospect, we think the PBoC could be reluctant to tolerate overly rapid downward moves in USD/CNY. If needed, it could take multiple measures to curb the [appreciation].”
Cheung and Credit Agricole colleagues see the renminbi remaining strong in the short-term but forecast that USD/CNH will rise to 6.50 by year-end.
“So the question is, would I be a buyer of dollar RMB right now? My honest answer is, I don't know,” says BMO Capital Markets’ Gallo in the earlier linked podcast. “What I do know though is that given China's fundamental backdrop, the PBOC's tolerance threshold for RMB appreciation is probably not miles away. So I would be cautious about getting super bulled up on the RMB right now.”
The Renminbi’s strength has stood out because of its occurrence in the face of a rising dollar and mounting economic headwinds in China, although it would become less sustainable if those headwinds lead the PBoC to cut its interest rate or take other action.
“We see PBoC tilting towards a dovish stance as growth prospects sour on top of Xi Jinping’s regulatory clampdown, China’s zero tolerance Covid policy and most recently the energy crunch,” says Andreas Steno Larsen, chief FX strategist at Nordea Markets, in an October forecast review.
“We expect PBoC to reduce the bank’s reserve ratio requirements and provide ample CNY liquidity. Also, we expect the bank to welcome a weaker Yuan – especially in a strong dollar environment,” Larsen and colleagues said.
Larsen and Nordea colleagues refer to the USD/CNY pair, which is the exchange rate that measures the onshore traded version of the renminbi against the dollar, although this is not traded outside of China, and there is often only a small difference between it and the offshore USD/CNH pair.
Nordea Markets forecasts USD/CNY to rise from 6.38 in late October to 6.60 by the new year, and to climb further in 2022 owing to a mixture of anticipated weakness in the renminbi and strength in the dollar that could result from changes in the Fed’s monetary policy.
“We continue to see genuine inflation risks especially in the US and the Fed gradually turning more hawkish,” Larsen said. “CNY is set to weaken as the combination of the Evergrande story and the energy price squeeze will lead the PBoC to ease monetary policy.”
FAQs
Will USD/CNH go up or drop?
Many of the analyst forecasts in this article suggest the USD/CNH exchange rate could rise before year-end, while envisages a decline beneath the lowest levels established in October – traders should note that the fall to these levels took many analysts by surprise.
Investors and traders should also note that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for conducting your own research. Always perform your own due diligence before investing. And never invest or trade money you cannot afford to lose.
What is the best time to trade USD/CNH?
The optimum timing would depend on whether a trader goes short or long on USD/CNH. The currency market is open 24 hours a day, five days a week. The EUR/PLN pair can be traded between Sunday at 22:00 BST (UTC +1) to the same time on Friday.
However, the largest share of FX trading is carried out in London during European hours, which means market liquidity and trading volumes are generally at their highest during that time.
When to buy or sell USD/CNH?
Generally speaking, short trades are most profitable when entered into at the highest possible price level and vice versa with long trades. However, traders should make their own decisions on when to buy or sell any asset or product following their own process of research and evaluation.
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