Suddenly jumped up! Who triggered the "surge" in the RMB exchange rate?

As of 17:30 on July 25, the onshore RMB exchange rate against the US dollar (CNY) and the offshore RMB exchange rate against the US dollar (CNH) reached 7.2318 and 7.2306 respectively, up 347 basis points and 323 basis points from the previous trading day, respectively. During the session, they hit the highest point since mid-May at 7.2050 and 7.2020 respectively. The maximum daily increase of RMB at home and abroad exceeded 600 basis points. "Especially in the afternoon, the continuous rise of RMB came too suddenly, which caught the foreign exchange market off guard." A foreign exchange trader of a Hong Kong bank told the 21st Century Business Herald reporter.

On July 25, the RMB exchange rate suddenly ushered in a "big explosion".

As of 17:30 on July 25, the onshore RMB exchange rate against the US dollar (CNY) and the offshore RMB exchange rate against the US dollar (CNH) reached 7.2318 and 7.2306 respectively, up 347 basis points and 323 basis points from the previous trading day, respectively. During the session, they hit the highest point since mid-May at 7.2050 and 7.2020 respectively. The maximum daily increase of RMB at home and abroad exceeded 600 basis points.

"Especially in the afternoon, the continuous rise of RMB came too suddenly, which caught the foreign exchange market off guard." A foreign exchange trader of a Hong Kong bank told the 21st Century Business Herald reporter.

In his opinion, the sudden surge in the RMB exchange rate at home and abroad on July 25 was a bit unusual - after all, the US dollar index fell slightly from 104.4 to 104.2 on that day, which might not "support" such a large increase in RMB.

The reporter learned from many sources that many investment institutions believe that the sudden sharp rise of RMB on and off the mainland on July 25 may be affected by four factors:

First, the relevant departments of the central bank have recently taken a series of "interest rate cuts" measures, which have made overseas financial institutions bullish on the future development prospects of China's economy and increased their long positions in RMB. The most obvious sign is that the offshore RMB exchange rate was higher than the onshore RMB exchange rate for the first time on July 25, indicating that overseas capital is more bullish on the RMB exchange rate than domestic institutions.

Second, the "catch-up effect" brought about by the sharp rise in the yen exchange rate. In the past two weeks, the yen-dollar exchange rate has risen by about 5.6%, from 160 to the integer mark of 152, which has largely reversed the view of the financial market that Asian currencies are under great depreciation pressure, and has driven many overseas investment institutions to dare to buy up the RMB and other Asian currencies with good economic fundamentals.

Third, the effect of China's high foreign trade surplus in the first half of the year has begun to ferment. Previously, due to the Fed's delay in cutting interest rates and the strong rebound of the US dollar, the market generally believed that the RMB exchange rate would decline. However, as the Fed's interest rate cuts approached and the strong cycle of the US dollar ended, the financial market began to turn its attention to China's good foreign trade data and foreign trade surplus in the first half of the year, and began to bet on the rise of the RMB exchange rate.

Fourth, the chain effect of Trump's deal continued to spread. As the market expected that Trump's chances of winning the election increased, Wall Street investment institutions became increasingly concerned that the new US government might implement a weak dollar in the future and put pressure on the Fed to speed up the pace of interest rate cuts. Therefore, many overseas capital began to buy up the RMB in advance as a "response".

Who is pushing up the RMB exchange rate in a big way?

"During the midday trading of July 25, the RMB exchange rate suddenly soared continuously, and the market once believed that the central bank intervened in the market, but no signs of intervention by the central bank have been found so far." The above-mentioned Hong Kong bank foreign exchange trader pointed out. Behind this is the market speculation that after the People's Bank of China launched a number of "interest rate cuts" this week, it was worried that the RMB exchange rate would be affected and continue to fall, and it might intervene in the market to boost the RMB exchange rate. However, in terms of the current market environment, the People's Bank of China may not be without the need to intervene in the market, because the high expectations of the Federal Reserve's interest rate cut in September have greatly alleviated the pressure of further depreciation of the RMB in the future.

He said frankly that in terms of the foreign exchange market, after the central bank lowered the 7-day reverse repurchase rate and LPR rate at the beginning of this week, the overall trend of the RMB exchange rate was relatively stable - although the onshore RMB exchange rate hit a low of 7.2776 this year on Wednesday, the overall decline was relatively gentle.

At the same time, the power of shorting the RMB in the foreign exchange market is relatively weak, because overseas speculative capital also realizes that the Federal Reserve's interest rate cut in September is "approaching step by step" and the US dollar is about to enter a downward cycle, which makes them feel that the chances of shorting the RMB in the short term are not high.

Many emerging market investment fund managers believe that the sudden surge in the RMB exchange rate on July 25 is likely to be affected by the current high risk aversion in the market. Recently, many large asset management institutions around the world believe that the escalation of international geopolitical risks in the future may become the biggest tail risk of future asset management. Under such circumstances, large global asset management institutions may increase their allocation of Chinese government bonds, causing both the demand for RMB and the RMB exchange rate to rise.

"In addition, the recent increasing discussions on Wall Street about the hard landing of the US economy have also led global capital to actively look for reliable and high-quality assets other than US assets. Among them, Chinese assets with good economic fundamentals may be strongly valued by global capital, thereby attracting a group of overseas capital to rush to buy up the RMB exchange rate for arbitrage." A Wall Street hedge fund manager pointed out to reporters. Behind this is the changing narrative logic of asset allocation of global investment institutions. In the first half of the year, there were two popular narrative logics in the asset allocation of the financial market: one is that the US economy still maintains a high degree of resilience in a high interest rate environment, and the other is that other major economies have more or less encountered some economic troubles, which also drove more capital to choose to buy up the US dollar. However, as the recent US economic data began to weaken and the economic fundamentals of emerging market countries improved with policy support, the narrative logic of asset allocation in the financial market has changed significantly. More and more global investment institutions are beginning to worry that the US economy may experience an unexpected hard landing, while the economies of emerging market countries may further improve. Therefore, more and more global investment institutions are beginning to invest funds in emerging markets, especially Chinese assets with low valuations, which will benefit the RMB exchange rate "first".

This directly led to overseas hedge funds and asset management institutions and other investment institutions increasing their long positions in the offshore market in advance, driving the RMB exchange rate to continue to rise. At the same time, overseas speculative capital that had previously shorted the offshore RMB saw that "the risk of losses from short-selling operations increased sharply", and stopped losses and closed offshore RMB short positions, further amplifying the RMB exchange rate increase and creating the RMB exchange rate surge on July 25.

"Change" in the trading atmosphere of the foreign exchange market

Several Hong Kong private equity fund managers told reporters that many global investment institutions have recently gone to Hong Kong to investigate investment opportunities in China and other countries in the Asia-Pacific region. This may be a major driving force for the continued rise in the atmosphere of buying the RMB exchange rate in the foreign exchange market.

"Another factor driving the RMB exchange rate to soar is that, despite the RMB exchange rate falling in the first half of the year, there are still many countries willing to increase the proportion of RMB in their foreign exchange reserves." The aforementioned Hong Kong bank foreign exchange trader pointed out. Recently, a survey of 40 central banks around the world released by UBS Asset Management showed that 70% of respondents said they were investing or considering investing in RMB, which was basically the same as last year's 72%.

In his view, more and more countries are willing to include more RMB in their reserve assets, which will invisibly provide long-term support for the RMB exchange rate. Especially under the influence of factors such as the current Fed's interest rate cut approach and Trump's hot trading, the above-mentioned "support" is likely to quickly turn into "market buying enthusiasm", leading to a significant rise in the RMB exchange rate on July 25.

It is worth noting that after the European trading session opened, the RMB exchange rate at home and abroad showed a certain degree of correction, giving up some of the gains.

The reporter learned from many sources that behind this, overseas quantitative investment funds began to technically short the RMB for arbitrage, given that the RMB exchange rate rose far more than the US dollar fell on that day. After all, they always believe that the rise in the RMB exchange rate needs to be "coordinated" with the corresponding decline in the US dollar index.

"However, the sentiment in the foreign exchange market has changed significantly. Some overseas investment institutions still believe that the series of interest rate cuts by the People's Bank of China this week may increase the divergence of monetary policies between China and the United States, leading to a further decline in the RMB exchange rate. But now, they believe that the bottom range of the RMB exchange rate (around 7.27) has been formed. With the resonance of China's series of measures to stabilize the exchange rate, the improvement of economic fundamentals and the approaching pace of the Fed's interest rate cuts, the probability of the RMB exchange rate bottoming out and rebounding in the future will be higher than continuing to bottom out." The aforementioned Hong Kong bank foreign exchange trader pointed out.