China | Understanding RMB exchange rate cycle

Summary

This report is trying to answer the three questions: What is the underlying logic of the ongoing RMB appreciation trend? Is the trend sustainable as the global economy normalizes? And where will the RMB exchange rate go at end-2021?

Key points

• Key points:
• From May 2020 to now, RMB to USD exchange rate seems to have been entering into a one-way appreciation trend with its accumulative appreciation for around 9.6%.
• Growth divergence in pandemic time, weak DXY index, interest rate divergence, the surprisingly resilient China’s exports and current account all seem to explain the ongoing appreciation.
• Will RMB to USD break the psychological level of 6 at end-2021? Cautiousness and conservativeness are needed.
• Except for the historical high interest rate differentials which might last for a longer period of time, other factors will be normalized as the global economy recovers with the vaccine roll-out, thus will not become a reason to support the RMB exchange rate any longer.
• The PBoC’s intension in maintaining a stable RMB exchange rate in order to maintain exports momentum and curb hot money inflows is important for the future RMB exchange rate prediction.

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