The foreign exchange market was shocked! What is the reason behind the sudden rise in RMB exchange rates at home and abroad?

In early trading on March 25, the RMB exchange rate at home and abroad suddenly set off a round of gains.

In early trading that day, both the domestic and foreign RMB exchange rates suddenly rose by about 400 basis points. Among them, the domestic onshore market RMB exchange rate against the U.S. dollar (CNY) once regained the 7.2 integer mark, hitting an intraday high of 7.1902; the overseas offshore market RMB exchange rate against the U.S. dollar (CNH) ) rose to the intraday high of 7.2316.

According to many industry insiders, the sudden surge in the RMB exchange rate has indeed caught the foreign exchange market by surprise.

"Many investment institutions in the foreign exchange market are also wondering why the RMB exchange rate suddenly soared." A Hong Kong bank foreign exchange trader told reporters. At first, the market believed that Japanese officials suddenly released a signal of "preparing to intervene in the currency market to support the yen", which caused the foreign exchange market's short-selling enthusiasm for Asia-Pacific currencies to suddenly cool down, driving the RMB exchange rate to rebound. Later, some investment institutions also believed that many foreign-funded enterprises last weekend Voices that are optimistic about China's economy have been released, which will help the RMB exchange rate to strengthen.

In the view of this Hong Kong bank foreign exchange trader, the biggest factor that really triggered the sudden surge in the RMB exchange rate in early trading on March 25 was that the RMB exchange rate was undervalued.

"Last Friday, affected by the unexpected interest rate cut by the Swiss National Bank, the domestic and overseas RMB exchange rates fell below the 7.23 and 7.28 integer marks respectively. However, in the view of many overseas investment institutions, the RMB exchange rate has obviously fallen too much, and there is strong momentum for exchange rate repair." he pointed out. Combined with the ongoing improvement in China's economic fundamentals and the continued large-scale accumulation of foreign capital in domestic bonds, many overseas hedge funds also admitted that the Swiss National Bank's unexpected interest rate cut should not cause such a large decline in the RMB exchange rate.

This drove many overseas investment institutions to quickly buy the RMB exchange rate at the bottom in the early trading on March 25, pushing the RMB exchange rate at home and abroad to hit an intraday high soon.

The reporter noticed that the RMB exchange rate rose and fell in the afternoon. As of 19:00 on March 25, the domestic and overseas RMB exchange rates were hovering around 7.2118 and 7.2498 respectively, giving up part of the early gains.

A Hong Kong private equity fund manager bluntly said that behind this is the fact that the U.S. dollar index continues to hover above 104.3, which poses a greater restriction on the rise of the RMB exchange rate. This is specifically reflected in the fact that some overseas quantitative investment funds have taken advantage of the high level of the U.S. dollar index to sell short on highs. RMB exchange rate arbitrage.

“However, after the RMB exchange rate suddenly rose on March 25, the market suddenly realized that the current bottom range of the domestic RMB exchange rate may be around 7.23, and as China’s economic fundamentals continue to improve and the Fed’s interest rate cuts approach, this bottom range is expected to continue to rise. High, even regaining the 7.2 integer mark." He analyzed.

Why the sudden surge?

"It's too sudden." The above-mentioned foreign exchange trader of the Hong Kong bank pointed out. In early trading on March 25, the RMB exchange rate at home and abroad suddenly rose by about 400 basis points, which really shocked the foreign exchange market.

"Last weekend, the foreign exchange market was still discussing that the Swiss National Bank's unexpected interest rate cut might cause Western countries to cut interest rates earlier than the Federal Reserve. Instead, it might cause the U.S. dollar index to rise instead of falling, which is not conducive to the strengthening of the RMB exchange rate." He recalled. However, after the RMB exchange rate suddenly rose sharply in early trading on Monday, many overseas investment institutions began to re-examine the correctness of the above views.

The reporter learned that the RMB exchange rate at home and abroad suddenly rose sharply in early trading on March 25, which was likely to be affected by Japan's intervention in the foreign exchange market at any time to support the Japanese yen.

On the morning of March 25, Masato Kanda, Japan’s Deputy Minister of Finance for International Affairs, made it clear: “The current depreciation of the yen is not in line with fundamentals and is obviously driven by speculation. We will take appropriate measures against excessive fluctuations. Take action and do not rule out any options." When asked about the possibility of direct intervention in the currency market, Kanda replied: "We have been preparing."

Affected by this, many overseas speculative capitals quickly reduced their short-selling risk exposures against the Japanese yen and other Asia-Pacific currencies.

"In the early trading of March 25, the Japanese yen and the renminbi were rising simultaneously, indicating that speculative capital began to worry that the central banks of Asia-Pacific countries may intervene in the foreign exchange market at any time, and they have increased their short positions in Asia-Pacific currencies such as the renminbi and the yen." The aforementioned foreign exchange trader of the Hong Kong bank said bluntly .

But he believes that this is not the biggest factor that triggered the sharp surge in the RMB exchange rate. The real trigger for the sudden surge in the RMB exchange rate on Monday morning was that many overseas investment institutions believed that the RMB exchange rate was oversold last Friday.

"Behind this is the unexpected interest rate cut by the Swiss National Bank last Thursday, which caused a wrong hit to the RMB exchange rate." The above-mentioned Hong Kong private equity fund manager said bluntly. After the Swiss National Bank unexpectedly cut interest rates, although the U.S. dollar index rebounded to around 104.3, the domestic and overseas RMB exchange rates fell below the 7.23 and 7.28 integer marks respectively, which was obviously an excessive drop.

An emerging market investment fund manager bluntly said that combined with the improvement of China's economic fundamentals and the large-scale increase of overseas capital in domestic bonds, the domestic RMB exchange rate should not be lower than 7.23. This is also the largest price for many overseas investment institutions to buy the RMB at the bottom in early trading on March 25. driving force.

In his view, although the RMB exchange rate surged and fell in the afternoon that day, this was more affected by the high performance of the US dollar index, but it will not change the enthusiasm of overseas investment institutions to actively hunt for the RMB exchange rate - if the domestic RMB exchange rate abnormally falls below 7.23 again, Overseas investment institutions will continue to hunt for the RMB at the bottom.

"Another factor that has caused the RMB exchange rate to fall back after a surge is that the current domestic and overseas RMB exchange rate differential has expanded to about 400 basis points, which may trigger a surge in cross-border exchange differential transactions and drag down both domestic and foreign RMB exchange rates." Emerging Markets Investment Fund noted.

RMB bonds are popular

Reporters have learned from many sources that the sudden surge in the RMB exchange rate has also led the market to believe that the bottom range of the RMB exchange rate is looming.

"After the domestic RMB fell below 7.23, there was a strong enthusiasm for bargain hunting in the market, indicating that the foreign exchange market believed that the current reasonable valuation of the RMB exchange rate should not be lower than 7.23." The aforementioned Hong Kong private equity fund manager believes. Behind this is the large-scale increase in holdings of domestic bonds by overseas capital since the fourth quarter of last year, which is providing strong support for the RMB exchange rate.

A domestic private equity fund bond trader pointed out that since March, foreign capital has continued to increase its holdings of domestic bonds. The reasons are: first, the country's geopolitical risks continue to escalate, which makes overseas capital pay more attention to the safe-haven properties of domestic RMB bonds; second, the greater prospects for RMB exchange rate appreciation and the relatively loose monetary environment help to increase the price of domestic bonds and attract overseas investors. Capital continues to increase its position in domestic bonds to make profits.

"This also makes the impact of the recent widening inversion of Sino-US interest rate differentials on the decline of the RMB exchange rate plummeting." He analyzed.

Data shows that as of 19:00 on March 25, the inversion of the interest rate spread between China and the United States (the difference between the yields on 10-year U.S. Treasury bonds) has widened to 190 basis points. However, in the view of many industry insiders, due to the continued increase of foreign capital's positions in domestic bonds, it cannot cause the domestic RMB exchange rate to fall to 7.3 again.

“In fact, more and more foreign investment institutions admit that in the short term, the Fed’s delay in cutting interest rates may cause the U.S. dollar index to rise to 105, which will put new downward pressure on the RMB exchange rate. On the other hand, they also believe that in the medium and long term, the Fed’s interest rate cuts will Eventually, the RMB exchange rate will rise." The aforementioned emerging market investment fund manager pointed out. Therefore, many overseas investment institutions have adopted trading strategies to hedge exchange rate risks in the short term and bullish the RMB exchange rate in the medium and long term, so that the RMB exchange rate is expected to gradually appreciate.