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Uncover the reasons behind the continued rise in the renminbi, is the market overexcited?

The renminbi has continued to soar, with the dollar trading at 6.7399, the lowest level since July 26, 2018, at midday trading in Asia as of Friday, January 11, Beijing time. The dollar hit a low of 6.7425 against the onshore yuan, also hitting its lowest level since July 26, 2018.

After Federal Reserve Chairman Powell made a "dovish" remark in favour of the market and a number of subsequent officials opposed further interest rate increases, the dollar index recently showed a marked decline, falling to 95.0241 yesterday, its lowest since October 16, 2018. This is 95.3532.

Analysts believe: "in addition to the recent decline in the US dollar index, the renminbi's surge is also influenced by factors such as the peak of seasonal exchange settlement at the beginning of the year, and the release of favorable trade negotiations between China and the United States, and so on. But this does not mean that the renminbi devaluation expectations completely dissipated and into the post-appreciation cycle. However, compared to last year, this year's exchange rate is unlikely to break through last year's low, and is expected to maintain overall stability throughout the year.

Risk reversal measures show the yuan's call options are the most popular since 2011, with the dollar likely to fall to the 200-day moving average position 6.7198.

The in-depth negotiations between China and the United States, which ended on Wednesday (January 9), sent a positive signal that the US dollar against the offshore RMB one-month risk reversal index fell to its lowest level since 2011. This shows that as the US dollar against the RMB spot exchange rate hit the highest level since July, the RMB call option is favored by the market.

However, Brad Bechtel, Jefferies's global head of foreign exchange, believes the market could be too ahead of time in betting on the yuan's rise.

Bechtel said: "the Sino-US trade talks do not have more specific details, but at this point in time, the market is a little overexcited. Perhaps it is too early to celebrate, if the trade situation changes the market may be caught off guard.

The dollar fell 1.75 percent against the offshore yuan this month, up 5.44 percent last year, and lagged behind Asian currencies. Analysts commented that China's stimulus measures to boost economic growth also helped the yuan appreciate.

The dollar fell 0.3 percent against the yuan on Thursday, and for the first time fell below the important psychological threshold of 6.80 for the first time since August last year. Although Bechtel thinks it is too early to be optimistic about the yuan, he still expects the yuan to explore the 200-day moving average at 6.7198.

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