US Rate Cut Impact: Yuan Soars Past 7.04, 6.8 Next?

The Chinese yuan has appreciated for three consecutive days.

On September 20th, the offshore yuan once broke through the 7.04 mark, and it was possible to exchange 1 US dollar for 7.0388 yuan in the offshore market.

What will be the future trend of the yuan exchange rate?

How long will it take to break through 6.8?

Before answering these questions, it is necessary to understand the reasons for the appreciation of the yuan in this round.

In the early morning of September 19th, Federal Reserve Chairman Powell announced a 50 basis point cut in the federal funds rate, which means that the United States has officially entered the interest rate reduction channel.

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Previously, there was some controversy in the market about whether to cut interest rates by 25 or 50 basis points, and the Fed has responded.

This time, the pace of interest rate cuts is relatively fast.

Before the interest rate cut, the federal funds rate in the United States was between 5.25% and 5.5%, which was a significant interest rate spread with Asian countries including China.

After the interest rate cut, although the spread still exists, it has narrowed somewhat.

At the same time, considering that the Fed is very likely to cut interest rates by another 50 basis points by the end of this year, there is a possibility that the spread will be further narrowed.

Capital is profit-driven.

When the risk-free interest rate of US dollar assets falls, some hot money will sell US dollars in exchange for other currencies, leading to the devaluation of the US dollar and the appreciation of other currencies.

The difference in the appreciation of various currencies against the US dollar has confirmed the conclusion that the narrowing of the interest rate spread is the main reason.

For example, from July 3rd to now, the Japanese yen has appreciated by 12.1%, which is the largest appreciation among mainstream Asian currencies.

This is because the Bank of Japan is unique and is raising interest rates, and the spread between it and the United States has narrowed the most; the yuan has appreciated by 3.7% during this period, far less than the yen.

The reason is that we are also in an interest rate reduction cycle, and the spread has narrowed less.

Therefore, to explore the exchange rate trend of the yuan and other Asian currencies, the focus should be on the interest rate policy of the United States.

In fact, as early as July this year, the market had basically determined that the Fed would cut interest rates in September, so many institutions and foreign exchange speculators began to sell US dollars and exchange for other currencies at that time.

At the same time, foreign trade companies exchanged the US dollar foreign exchange they had accumulated in their hands for yuan and other currencies.

Don't underestimate the impact of foreign trade companies' currency exchange on the exchange rate.

Their concentrated demand for currency exchange in the short term has promoted the rapid rise of the exchange rate of non-US dollar currencies.

Understanding the above content, we can analyze when the yuan exchange rate will break through the 6.8 mark.

In my view, it is quite difficult before the end of this year.

Although the Fed has just cut interest rates, the market has long expected it and has been realized in the exchange rate in the previous months.

Whether it is the Japanese yen, the South Korean won, or our yuan, they have all started to appreciate before the United States has officially announced the interest rate cut, and the expectation also includes the impact of the Fed's interest rate meeting on the market in November and December.

This means that the short-term factors driving the appreciation of the yuan exchange rate have basically been released, and it is difficult for the United States to bring a significant impact to the exchange rate market even if it cuts interest rates again in the remaining time of this year.

Of course, if an unexpected event occurs, it is another story.

For example, if the United States suddenly finds that its economy is not as good as expected, and the employment rate has fallen sharply, it must "take a strong medicine", so it cuts interest rates beyond expectations, and cuts by more than 100 basis points within the year.

A weak US dollar will cause funds to quickly leave the United States, enter other economies, and exchange for the local currency, which will accelerate the appreciation of the exchange rate of non-US dollar currencies.

It will be very normal for the yuan to break through 6.8 in the short term.

On the contrary, if the prices in the United States rebound after the Fed cuts interest rates, and the increase in the CPI expands, then the United States will adjust the path of interest rate cuts, and it may maintain the current interest rate unchanged in the next two interest rate meetings.

The expectation of interest rate cuts fails, the US dollar is strong again, and the yuan will not only not appreciate but also depreciate.

These two situations are not completely impossible, but the probability of their occurrence is indeed very small, and they are usually not within the scope of normal consideration.

Based on the above rigorous and comprehensive analysis, we can basically draw such a conclusion: it is difficult for the yuan exchange rate to further appreciate in the short term.

On the other hand, if the yuan appreciates too quickly, it is obviously not conducive to China's economy.

China's economic structure is still dominated by exports, especially when the internal effective demand is insufficient, foreign trade plays a key role in promoting economic growth.

Currency appreciation is not conducive to exports, so when the yuan exchange rate rises unilaterally, the foreign exchange department may intervene to suppress the rapid appreciation.

Many times, things are so complex, falling too much is not good, and rising too fast is also not good, and a balance point needs to be found.