Asian currency markets fluctuate violently under the strong US dollar. How foreign trade companies manage exchange rate risks

In recent times, the shock wave of lowering expectations for U.S. interest rate cuts is still spreading. The exchange rates of the Japanese yen, Korean won, Indian rupee, Indonesian rupiah and other domestic currencies have fallen sharply against the U.S. dollar. The Japanese yen has continued to decline against the U.S. dollar after falling below a 34-year low. , the RMB central parity rate is also testing a periodic low.

In the context of the sudden changes in the global market, how much pressure will the non-US market endure? How should Chinese import and export companies manage foreign exchange risks?

Recently, during the London Stock Exchange Group's 2024 Market Outlook Forum, Liu Yang, a foreign exchange expert and general manager of the financial markets business department of Zheshang Zhongtuo Group, told China Business News that due to the need to avoid a resurgence of inflation, the timing of the Federal Reserve's interest rate cuts has been constantly questioned. This pushed back, which put pressure on non-US currencies. For example, even if the Bank of Japan raises interest rates, the world seems to be willing to use the Japanese yen as a cheap financing currency, that is, borrowing Japanese yen to purchase US dollar assets. This has also caused the Japanese yen to approach the 160 mark against the US dollar. Exchange rate issues also plague Chinese companies. In his view, for Chinese import and export companies, import companies should maintain a risk-neutral hedging idea and purchase forwards in advance according to demand when the current swap point is more favorable. For export companies, they can choose current US dollar deposits, combined with put options for protection, and choose to settle foreign exchange at a more appropriate time.

Strong dollar intensifies volatility in Asian currencies

The latest U.S. data did little to give the market, which has been volatile recently, a breather, with the Fed's favorite inflation gauge once again exceeding expectations.

On the evening of April 26, the latest data from the U.S. Department of Commerce showed that the core PCE price index, excluding food and energy, grew at a year-on-year rate of 2.82% in March, higher than the expected 2.7%. The previous value was revised upward to 2.8%. The month-on-month growth rate was 0.3%, in line with expectations and unchanged from the previous value. On a three-month annualized basis, the core PCE price index jumped to 4.4%.

"Looking at different industries, driven by the service industry, the overall PCE price index accelerated both month-on-month and year-on-year. For core PCE prices, service prices are also the biggest driver. Service inflation excluding housing rose again, with the previous value at the same time was revised upward. Among them, transportation services and other services are the biggest driving factors," Matt Weller, global research director of Jiaqiang Group, told reporters.

In the past two weeks, a series of data has caused the U.S. dollar index to rise to 106. The 10-year U.S. bond yield has risen from around 4% to more than 4.6% today. Expectations of an interest rate cut in June have disappeared, and the market is optimistic about the first interest rate cut. The prediction time has come to September or even December. For example, a week earlier, U.S. retail sales, known as "horror data", increased by 0.7% month-on-month in March, higher than the expected 0.3%, which caused a sharp correction in U.S. stocks; U.S. CPI inflation data in March greatly exceeded expectations. It rose 3.5% year-on-year (consensus 3.4%), the highest since September last year.

The Japanese yen, which has performed the worst this year, is a product of the strong US dollar. The Bank of Japan decided on April 26 to maintain the current monetary policy unchanged and did not implement quantitative tightening as expected. After the news was announced, the Japanese yen, which had been declining continuously, "dived" again. At one time, the Japanese yen-to-US dollar exchange rate fell below 158 yen to 1 US dollar, once again setting a new low since May 1990.

"It is precisely because of the high inflation data in the United States that even if the USD/JPY falls, it may be supported in the process until the fundamentals change. At the end of this week, the USD/JPY broke through the 157 mark and approached 158 ." Weller told reporters that U.S. inflation data over the past few months, and even the past few quarters, have stalled above the Fed's 2% target. Even if the market is worried that the Bank of Japan may intervene, it still does not help. For example, at 08:00 London time on April 26, USD/JPY fell 150 points from a high of nearly 157 (which raised questions about the possible intervention of the Bank of Japan). ), but then rebounded strongly.

Liu Yang told reporters that the Japanese government has repeatedly expressed concerns about the continued depreciation of the yen, which will continue to import inflation into Japan and worsen its terms of trade (making exports cheaper for foreign buyers, but imports more expensive). However, the depreciation of the yen is also good for Japan's exports (such as semiconductors, automobiles, etc.). Traders continue to favor high-yielding foreign currencies over the yen amid a lack of strong willingness from the Bank of Japan to intervene.

The yen is not the only currency that has been "in trouble" recently. At the end of last year, the won-to-USD exchange rate was less than 1,300 won per US dollar, and has now fallen to nearly 1,380 won per US dollar. On April 16, it once fell below the 1,400 won mark during the session. The previously held meeting of the U.S., Japan and South Korea Finance Ministers stated that the three countries "recognized the serious concerns of Japan and South Korea over the recent sharp depreciation of the Japanese yen and South Korean won" and would closely consult on foreign exchange market fluctuations.

At the same time, the currencies of many other Asian countries also showed similar trends. Asian currencies such as the Indian rupee, Indonesian rupiah, Malaysian ringgit, Vietnamese dong, and Philippine peso all continued to depreciate. The Bank of Indonesia recently raised three major interest rates by 25BP to "strengthen the stability of the Indonesian rupiah exchange rate." However, the effectiveness of this measure is still questioned because despite the Bank of Indonesia's repeated market intervention, it failed to prevent the Indonesian rupiah exchange rate from falling from the beginning of the year. The level depreciated by more than 5%.

The yuan is under short-term pressure

People from all walks of life believe that under the strong US dollar, the RMB may be under short-term pressure. However, compared with some Asian currencies, the recent fluctuations of the RMB are actually not large. The Japanese yen has also depreciated by nearly 4% against the RMB in the past three months. Similarly, compared with the Bank of Japan's "verbal intervention", the Bank of China's efforts to stabilize the exchange rate through multiple measures are obvious. The USD/CNY has been fluctuating in the range of 7.15~7.25 this year.

As of the close of the past week, USD/CNY was at 7.2464 and USD/Offshore RMB was at 7.2687.

Several foreign bank strategists told reporters that for now, they still believe that the US dollar/renminbi will fluctuate in a range below 7.3, and the People's Bank of China's willingness to maintain stability is still outstanding. In recent times, the countercyclical factor range of the RMB central parity rate has been around 1,000 to 1,700 points.

"In addition to the central parity rate, the central bank may need to use more methods to maintain the temporary stability of the RMB exchange rate, especially in the context of frequent global political events this year." Liu Jie, head of China macro strategy at Standard Chartered Bank's Global Research Department, recently told the first In an interview with Finance and Economics, he said that doing more foreign exchange swaps in the domestic market and moderately tightening liquidity in the offshore RMB market may also be options in the toolbox.

Wang Ju, head of foreign exchange and interest rate strategy for Greater China at BNP Paribas, also recently told China Business News that since March 22, the central bank of China has set the central parity rate below 7.1 every day to send a signal of stability. "We believe that the central bank's attitude towards currency stabilization is obvious in the short term. However, due to the large deviation between the central parity rate and the actual exchange rate, the spot transaction price has approached the 2% fluctuation upper limit set by the central bank, which is around 7.24. Therefore, the central bank needs to use a variety of methods To maintain the stability of the RMB exchange rate, such as lowering foreign exchange swaps in the domestic market and moderately tightening liquidity in the offshore RMB market, "In her view, the central bank will maintain the central parity rate at around 7.1 in the short term to keep the RMB exchange rate stable at 7.1. ~7.3 interval.

But overall, the release of future exchange rate pressure depends more on when the U.S. dollar starts to weaken. So, is the dollar expected to weaken in the future?

“We have already seen an easing in the Middle East conflict between Iran and Israel, while improving Eurozone data has started to drive a rebound in the euro. Additionally, much of the repricing of U.S. interest rates is already priced in, and if any follow-on U.S. economic If the data falls short of expectations, the dollar may weaken," Weller told reporters.

In his view, in the coming week, we need to pay attention to a series of major U.S. events and economic data. On May 2, the Federal Reserve will announce its interest rate decision. Since there is no hope of cutting interest rates in May, the focus of this meeting will be how the Federal Reserve assesses the trends in prices and employment. Previously, Fed Chairman Powell and others dismissed higher inflation data in the early months of the year, but their rhetoric has changed recently, and the dollar has risen accordingly. Markets now expect the meeting to be more hawkish. But any sign of a rate cut before the end of the summer will now provide a dovish surprise; non-farm payrolls data will be released on May 3, and any signs of weakness in U.S. employment or wage data may lessen doubts about the Fed’s ability to cut rates. concerns, triggering a sell-off in the U.S. dollar and a new round of gains in gold; the U.S. ISM Services Purchasing Managers Index will also be released on the same day. The S&P Global Purchasing Managers Index released last week showed that the growth rate of U.S. business activities in April A sharp slowdown, indicating weak demand.

Foreign trade companies should respond to fluctuations with a risk-neutral concept

At present, pressure on the RMB exchange rate still exists, and it is not ruled out that subsequent market fluctuations will increase, which will test the coping capabilities of import and export enterprises. Therefore, as the central bank has emphasized many times before, it is crucial to guide enterprises and financial institutions to adhere to the concept of "risk neutrality" important.

Liu Yang told reporters that under the concept of risk neutrality, import and export companies can adopt different strategies. For export companies, due to the current high U.S. dollar interest rates, companies can still retain U.S. dollar demand deposits and wait until the time window when the price is more suitable to settle foreign exchange.

“The current cost of forward foreign exchange settlement is high because the swap point has fallen deeply and is in the negative range (the one-year period is about -2900 points), which means that companies with forward foreign exchange settlement can currently only exchange 1 U.S. dollar for 7 yuan. About. If the enterprise itself has strong professional capabilities, it is recommended that the export enterprise can buy some relatively long-term USD/RMB put options, so that it can provide some protection in the other direction while retaining USD deposits.”

For import companies, he believes that it is still necessary to maintain the principle of "risk neutrality" and manage foreign exchange exposure in advance. "For example, when signing a contract, you should start to manage maturity risks, because the domestic one-year swap point is currently more than -2,900 points. Even after deducting the cost of forward foreign exchange risk reserves, if you make a relative comparison The current price of long-term forward foreign exchange purchases is less than 7.25, but after deducting nearly 3,000 negative swap points, the one-year forward foreign exchange purchase can reach about 7.25. This price is actually very good. Therefore, companies that need to purchase foreign exchange can make arrangements in advance to lock in exchange rate risks.”