Recently, the RMB exchange rate and the US dollar index showed a "double strong" pattern. On November 16, the onshore yuan breached 6.37, its highest level since June 1. Meanwhile, the DOLLAR index also rose above 95. Against the backdrop of the recent continued strengthening of the US dollar, the three major RMB exchange rate indices rose rather than fell, showing a strong performance.

Experts predict that the short-term DOLLAR index is expected to continue to maintain a strong performance, and near the end of the year, supported by strong exports, the RMB exchange rate is also expected to maintain strong performance.

The renminbi and the us dollar rose together

The DOLLAR index strengthened to its highest level since July 2020 on the back of a significantly stronger-than-expected year-on-year RISE in US CPI in October.

The Chinese currency is also strong. According to the China Foreign Exchange Trade System, as of November 12, the CFETS RMB exchange rate index was 101.08, the highest since December 2015, up 0.25 per week. The BIS basket RMB exchange rate index was 105.25, up 0.1 on a weekly basis. The SDR currency basket RMB exchange rate index was at 99.49, up 0.28 per week. So far this year, the CFETS RMB exchange rate index has risen more than 6%.

"Us inflation has surged recently and expectations of monetary policy tightening are rising. Meanwhile, the Bank of England held off raising interest rates in November, the President of the European Central Bank reiterated that it would not raise rates next year, and market expectations for tighter monetary policy in the UK and eurozone are cooling." Wang Qing, chief macro analyst at Orient Jincheng, said the latest developments in monetary policy on both sides of the Atlantic were the main reason behind the recent rise in the DOLLAR index.

Against the background of the rising DOLLAR index, the RMB exchange rate against the US dollar did not depreciate simultaneously, but appreciated somewhat, which directly promoted the three RMB exchange rate indexes to a greater extent. Wang Qing believes that there are two supporting factors behind the recent strong operation of RMB: First, entering the fourth quarter, China's export remains strong, the demand of foreign exchange of export enterprises pushes up the RMB exchange rate, and the market sentiment is more inclined to be long RMB; Second, China and the US held their first video meeting on November 16. The meeting increased the international community's positive expectations for China-Us relations, and also became an important reason for the RMB exchange rate to show a strong trend during the dollar's surge.

Lou Feipeng, a researcher at Postal Savings Bank of China, said that the ECONOMIC fundamentals of the United States were generally better than those of Europe and Japan, and monetary policy was tightened earlier than those of Europe and Japan, which supported the higher DOLLAR index from the economic fundamentals and policy aspects. China's economy continues to recover steadily and exports remain relatively high year-on-year, which supports the RMB exchange rate from the economic fundamentals. Monetary policy has been maintained continuously and steadily, providing support for the RMB exchange rate from the policy perspective.

Two-way fluctuation of RMB exchange rate is normal

Will the rise of RMB and DOLLAR continue? Industry insiders believe it depends on the supporting factors behind both. The key factor behind the yuan's strength is exports. China's highly resilient supply chain has supported exports amid the global pandemic. In addition, the steady flow of money into China and the passing of $1 trillion in domestic dollar deposits by Chinese companies have also calmed the yuan's volatility, allowing companies to settle any depreciation in the currency, pushing it up again.

The dollar's recent strength has been driven by stronger than expected US inflation, which has led to stronger nominal growth and higher interest rate expectations. The short-term DOLLAR index is expected to remain strong under the influence of the sentiment of rate hike expectations ahead. Everbright bank financial markets macro researcher sandy feng is expected, the dollar index center will continue to rise, this is mainly because the dollar liquidity environment or the United States financial environment medium toward the direction of the "closed", that is the fed's policy normalization cycle starts, which is equivalent to dollar liquidity in the recovery of the global economic system. At the same time, the US recovery is relatively ahead of other developed economies such as Europe, and the fundamentals and policies will also be positive for the DOLLAR.

As for the future trend, Wang Qing judged that China's export momentum will not weaken significantly before the end of the year or even to the first half of next year, and export enterprises' demand for exchange will continue to support the RMB exchange rate. After the video meeting between the two presidents, the gradual implementation of a series of specific arrangements will also exert an upward pull on the RMB exchange rate. Therefore, in the short term, the RMB exchange rate will likely continue strong momentum.

"Looking ahead to 2022, the growth gap between China and the US is likely to narrow for the time being. The Direction of the Us Federal Reserve's monetary policy tightening is relatively certain, while domestic monetary policy will continue to stick to the flexible, precise, reasonable and appropriate tone, and the possibility of a wider margin cannot be ruled out. Therefore, it is unlikely that the RMB will continue to step out of the unilateral appreciation market in the future and return to the two-way volatility pattern with a high probability." Ching wong said.

Zhou Maohua also believes that the RMB will continue to operate near the reasonable and balanced level, and two-way fluctuations will become normal. First, economic fundamentals and policy stability. The economy is expected to operate within an appropriate range, and the monetary policy will remain prudent. Second, the balance of payments should be basically balanced, and two-way cross-border capital flows should be rational and orderly. Third, the dollar's future momentum is moderate. More than 4 million jobs in the US have yet to be replaced, the epidemic has not been fully brought under control, and the normalization of US policies has been slow. It is worth paying attention to that the global epidemic prevention, economic recovery and inflation prospects are not clear, the recovery of various countries is uneven, policy differentiation has caused investor differences, and the market volatility is relatively violent.

More market players prefer to use RMB

To avoid exchange rate risks, more market players tend to use RMB in cross-border trade and investment. According to the report on RMB Internationalization 2021 recently released by the People's Bank of China, the volume of cross-border RMB settlement related to the real economy, such as current account and direct investment, has grown rapidly, and the use of RMB in major areas such as bulk commodities and asean and other regions has further increased.

According to statistics, in the first half of this year, the amount of cross-border RMB receipts and payments by banks on behalf of customers totaled 17.57 trillion yuan, up 38.7% year-on-year. The yuan ranked fifth among major international payment currencies in June, according to data released by the Association for Global Banking and Financial Telecommunication.

"Exporters generally use stronger currencies more to settle their trade. The yuan's rise against a basket of currencies this year means it has appreciated against most currencies. When overseas enterprises export to China, they charge RMB, which not only avoids the risk of exchange loss, but also generates a certain amount of exchange income and thickens their profits after converting to the domestic currency." Wang Qing thinks.

In Mr Zhou's view, this reflects global investors' long-term optimism about China's economy, making the renminbi one of the world's most stable currencies. More and more foreign trade enterprises have increased the proportion of RMB settlement when signing foreign trade contracts next year.

The increased enthusiasm of domestic and foreign enterprises in using RMB is also an important reflection of the steady progress of RMB internationalization. Central bank, said the next stage, will adhere to the market drivers and the enterprise independent choice, to further improve the policy support system of cross-border yuan use arrangement and infrastructure, promote two-way open financial market, the development of offshore RMB market, to create a more convenient environment for market main body to use the yuan, at the same time, further improve the cross-border capital flows are prudent management framework, We will guard against systemic risks