RMB exchange rate breaks 7 for the first time this year, will the US dollar hit a new high again? | Forex Talk Vol16

RMB breaks 7 exchange rate vs USD, will USD hit new high?

The cross-border seller, Mr. Wang, has been quite happy recently. The foreign exchange market has broken through the month-long “bull market” since the end of April. The USD-RMB exchange rate has broken through several key levels such as 6.9 and 6.95, and has even surpassed the integer 7 in recent days. Not only the USD, but also the exchange rates of the Euro and the Pound have also experienced varying degrees of increase. Moreover, the Federal Reserve recently raised interest rates by 25 basis points. Mr. Wang wonders whether this means the USD will start another wave of gains?

On the early morning of May 4th, the Federal Reserve announced a 25 basis point interest rate hike, bringing the interest rate level to 5%-5.25%, the highest level in more than a decade. This is the 10th consecutive interest rate hike by the US since March 2022. Is this also the last interest rate hike? Unfortunately, both the Federal Reserve’s statement and Chairman Powell’s speech continue to be “ambiguous”, and the market has not been able to obtain clear information.

Since the “Silicon Valley bankruptcy” incident, the Federal Reserve’s attitude towards interest rate policies has been relatively vague, leaving sufficient room for the next policy action and avoiding making definite statements.

On the one hand, the Federal Reserve’s monetary policy statement deleted the words “additional policy tightening may be appropriate”, while before March, the wording was “continuing to raise interest rates is appropriate”. The gradual softening of the interest rate hike wording seems to suggest that interest rate hikes are about to stop;

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On the other hand, Federal Reserve Chairman Powell also stated that inflation is still too high and it is too early to say that the interest rate hike cycle has ended. Regarding the recent acquisition of First Republic Bank, Powell does not seem to be worried, stating that “the banking industry has generally improved and the US banking system is stable and resilient.”

The ambiguity of the Fed’s attitude has also caused the US dollar exchange rate to be stuck in a range-bound trend for some time. From mid-to-late March until the end of April, the USD/CNY exchange rate fluctuated within a narrow range of 6.83-6.9, lacking a clear direction. However, after May, the US dollar exchange rate continuously broke through key levels such as 6.9, 6.95, and 7. Does this mean that the US dollar has entered a new round of appreciation space, and even refreshed the previous high point of 7.3?

Old Li’s opinion:

Although the US dollar has performed relatively strongly in the short term, the probability of a significant long-term rise is still small. This is because the factors supporting the rise and fall of the US dollar are evenly matched at present, and no obvious trend has formed. The main factors supporting the rise of the US dollar at present are: the US inflation rate is still high, and employment data such as the US unemployment rate are also strong; while the main factors supporting the fall of the US dollar are the harm and risks of rate hikes on the economy, as well as the possibility of Chinese exporters concentrating on foreign exchange in the near future.

Let’s first look at the inflation data

On the evening of May 10th, the US announced the April inflation rate of 4.9%, which has fallen for the tenth consecutive month since reaching its peak of 9.1% in June 2022. However, the core CPI (a price index that excludes the impact of food and energy prices and is considered more accurate in reflecting changes in the price level) recorded 5.5%, which has remained at a level of 5.5%-5.7% since December last year, showing the stickiness of the inflation level and still a considerable gap from the 2% inflation target. This is also the most important factor that restricts the Fed from stopping rate hikes and also supports the US dollar’s strength.

US CPI Index Trend Chart

Image source: zllp.myyw=d=_u=s10_okgyv?l ai l/289616

Looking at Employment Data Again

US employment data has been relatively strong, and since hitting a high of 14.7% unemployment rate in April 2020, it has been gradually improving. Even after 10 interest rate hikes, the unemployment rate still hit a new low of 3.4% and has recovered to pre-pandemic levels. Strong employment data has always supported US interest rate hikes and has also been a positive factor for the US dollar.

US Unemployment Rate Trend Chart

Image source: zllp.myyw=d=_u=s10_okgyv?lr=dy289349

Although inflation and employment data have supported the US dollar, risk events represented by Silicon Valley Bank have exposed the side effects of US interest rate hikes. In early May, another bank collapsed, indicating that US financial risks still exist. Even though the Federal Reserve is optimistic about the stability of the financial system, potential risks always hang over the US economy and the US dollar exchange rate, and if the situation continues to deteriorate, it will have a significant impact on the US dollar.

In addition, at the beginning of this year, the appreciation of the RMB exchange rate caused cross-border exporters to have a weak willingness to exchange foreign currency, while cross-border importers were more inclined to purchase foreign currency due to the better exchange rate. This has also helped push the RMB exchange rate down to some extent. However, starting in April, cross-border exporters who previously held foreign currency began to gradually exchange it, which is not conducive to a significant appreciation of the US dollar exchange rate.

In short, there are factors influencing the strengthening and weakening of the US dollar at present, and the market will fluctuate in the short term, which will cause fluctuations in the US dollar exchange rate. Although the integer 7 has been broken, there is no need to overemphasize the significance of breaking 7. The probability of the RMB devaluing significantly, even breaking through last year’s high of 7.3 again, is still not high. Cross-border exporters who previously held foreign currency can gradually exchange RMB above 7. However, in the long term, with the cessation of US interest rate hikes and the continued recovery of the Chinese economy, the possibility of the US dollar weakening against the RMB is still high, and attention should be paid to the results of the Federal Reserve’s interest rate decision on June 14.

Currency and Exchange Rate Check

You can also log in to the WorldFirst backend and click on “Currency and Exchange Rate Trend Check” on the homepage to check the exchange rate trend.

We recommend that you claim the exchange rate flash coupon, which can be redeemed at specified times from Monday to Friday each week, and enjoy better exchange rates. If you accumulate the redemption of 500,000 US dollars or the equivalent in euros, you can redeem an additional approximately 1,300 yuan!

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Disclaimer: Any opinions or views expressed in this article are for reference only and do not represent the official stance of WorldFirst. They do not constitute any advice or offer for any transaction, hedging, buying, selling or investment strategy, nor do they constitute any prediction of the possible changes in certain exchange rates or prices in the future.

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