- 2024-10-09
- News
The RMB exchange rate has broken 7.27
On March 22nd, China's three major stock indices closed in the red, with more than 4,300 listed companies experiencing a decline in stock prices, and less than 1,000 companies saw an increase. In fact, without looking at the market, I could guess that the A-share market was not doing well because there was not-so-good news from the foreign exchange market: the yuan exchange rate plummeted.
The logic is very clear. Participants in the offshore yuan market are international capital. A decline in the yuan exchange rate indicates that capital is buying dollars and selling yuan. To raise enough yuan to exchange for dollars, some yuan assets must be sold, and A-share stocks are one of the main targets. Therefore, it is certain that northbound capital is net outflowing from the A-share market.
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I did not check the flow of northbound capital in the stock market in detail, but you can check it yourself to see if I am correct.
Back to the yuan exchange rate, let's first look at the offshore yuan trend chart on March 22nd to feel what a "dive" in exchange rate means.
It can be seen that the yuan suddenly depreciated rapidly, with a depreciation of 0.79% within the day. Please note that this is not a stock, and a 0.79% increase or decrease in the exchange rate is a significant fluctuation. It broke through several integer levels in one day and has now broken through 7.27 (7.2785) and is heading towards 7.28.
In the recent period, the offshore yuan has been relatively stable, always hovering around 7.20 and 7.21. It was only on March 22nd that it suddenly depreciated, and the last time the exchange rate broke through the 7.27 level was four months ago in November last year.
Is it only the yuan that has been hit by a sudden depreciation? Not at all. The euro and the pound against the dollar have also depreciated. Taking the pound as an example, it temporarily depreciated by 0.56% on March 22nd and 1% on March 21st, with a cumulative depreciation of more than 1.5% over two days. Even the yen, which has just announced an interest rate hike, has not been spared, with the exchange rate breaking through 151, just one step away from breaking the historical record.
The fact that everyone is depreciating can only prove one thing, that is, the dollar is too strong. This is indeed the case. The following chart shows the trend of the US dollar index on March 22nd. It is not an exaggeration to describe it as "soaring"? After a 0.35% increase, the US dollar index reached 104.36.
What happened in the United States across the ocean that made the dollar a hot cake in the eyes of capital? It is strange to say that it has nothing to do with the United States itself, and the instigator is Switzerland.
Don't underestimate Switzerland. Although the total population of this country is less than 9 million, which is less than the population of some of our larger prefecture-level cities, Switzerland is recognized as a highly developed country in the world, and it is not comparable to countries like South Korea that have just entered the threshold of developed countries. More importantly, Switzerland's financial industry is very developed. I believe you have all heard of the big name of Swiss banks.Switzerland's robust economic strength and advanced financial industry have placed the Swiss Franc among the world's most important currencies. The Swiss National Bank, responsible for issuing the Swiss Franc, thus holds a certain presence on the global stage. On the evening of March 21st Beijing time, the Swiss National Bank delivered a "surprise" to the world.
Unexpectedly, the Swiss National Bank announced a reduction of the benchmark interest rate from 1.75% to 1.5%.
It's noteworthy that the Federal Reserve, the European Central Bank, and the Bank of England have not yet lowered interest rates, yet the Swiss National Bank, in a move some might call "unsportsmanlike," broke the ice and became the first Western mainstream economy within the G10 to lower interest rates. Prior to this, the market had widely predicted that Switzerland would not lower interest rates, only to be proven wrong.
As for the reason behind the rate cut, the official Swiss stance is that domestic inflation has been controlled, and there is no need to maintain high interest rates. Let's not debate whether Swiss inflation has truly been controlled, but the benchmark interest rate before the cut was only 1.75%, which is significantly lower compared to the United States' 5.5% interest rate level. Nevertheless, they decided to proceed with the rate cut, even resorting to a surprise move.
The rate cut by Switzerland itself would not cause too much turmoil in the foreign exchange market. The key is that it led the market to believe that European economies, including Switzerland, might not be able to withstand the pressure of high interest rates, and that other countries would follow suit and begin lowering rates. Concurrently, in 2023, the economic growth rates of several major European economies have been disappointing, with Germany, the largest economy in Europe, even experiencing negative growth. Additionally, the Russo-Ukrainian war, the Israeli-Palestinian conflict, and the Red Sea crisis have all had a continuous negative impact on the European economy. These factors combined further confirm the need for Europe to stimulate its economy through interest rate cuts.
On the other hand, the United States has not seen any significant impact on its economic and employment data despite being in a high-interest-rate environment over the past two years, with the economy performing well. Federal Reserve Chairman Jerome Powell is in no rush to lower interest rates. Last year, there were predictions that the United States would lower rates by March of this year, but now it seems that the first rate cut might not come until June, and it could even be delayed until the fourth quarter.
While some European countries have already taken the lead in lowering interest rates, others are likely to follow. The United States, however, is not in a hurry to reduce the federal funds rate and will maintain a high-interest-rate environment for a considerable period. Where do you think profit-driven capital will flow and which currency will they choose?
Obviously, it would be the United States with higher interest rates and a longer maintenance period. As a result, we have witnessed a strong US Dollar Index, with funds selling off foreign assets and currencies to purchase US dollar-denominated assets, driving up the value of the US dollar against the法定 currencies of all other countries.
Piercing through the fog to see the essence, whether it's the offshore yuan breaking through 7.27 or the British pound depreciating by more than 1.5% in two days, the unexpected rate cut by the Swiss National Bank is merely a superficial factor causing turmoil in the foreign exchange market. The fundamental reason is still related to the US dollar.
The market compares the interest rate policies of various countries with those of the United States to determine whether holding US dollars is profitable at this time, and then makes investment decisions. In other words, no matter which economy takes the lead in changing its monetary policy, it ultimately has to be compared with the United States. This was the case with the Bank of Japan's rate hike earlier and is also true for the Swiss National Bank's rate cut now.It has to be said that the unique position of the United States in the global financial market is both enviable and worrying.
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