Forex Comment Jan 27

Yuan breaking through the 'red line'

Chinese currency reached 6.47 to the dollar on Wednesday January 27 and still has room to appreciate, according to China Financial Network

Yuan breaking through the 'red line'
Image: Reuters.

(ATF) In 2021, the yuan exchange rate was always expected to appreciate while rate fluctuations were also tipped to become more frequent.

"6.5" to the US dollar had previously been regarded as a "red line" for RMB/yuan appreciation. But today, we are at 6.47.

Looking forward, there is still room for the yuan to appreciate against the dollar, according to the China Financial Network. The performance of the domestic and foreign economic recovery, plus the trend of monetary policy and of the US dollar index will not change in the short-term. The Chinese economy will continue to accelerate recovery, and monetary policy will gradually shift to normalization, while the dollar index will be sluggish in the US.

The recovery and loose monetary policy will continue to maintain a weak trend. Therefore, the trend of the yuan exchange rate will remain unchanged, it said.

Meanwhile, the US dollar has continued to depreciate, but the foundation for maintaining the relative strength of the US dollar is still relatively solid: Firstly, the US economy is relatively resilient. The US took the lead in recovering from the global advanced economies after the 2008 economic and financial crisis. From 2010 to 2019, the US GDP maintained a steady growth rate of 1.55% to 2.93%.

The second point is that the United States has relatively rich fiscal and monetary policy tools, and is backed by a strong capital market, a global financial asset allocation mechanism, and technological innovation that occupies the top of the global industrial chain. The relative advantage of the US dollar still exists, and it is difficult to replace it in the short-term.

At present, it is very cost-effective to exchange the US dollar relative to half a year ago, but whether to exchange or hold the US dollar still needs to be analysed in detail according to personal circumstances. Industry insiders believe that for families who plan to study abroad or have already studied abroad, the epidemic has disrupted their education plans, and it is more important to allocate a certain proportion of foreign exchange assets such as US dollars.

For example, in the face of the impact of the epidemic, if there are unexpected needs for short-term stays abroad, certain foreign currency payment protection is required. If you want to change a dollar for pure investment purposes, you need to consider the risk of further impairment of the dollar in the future.

At the same time, with the support of China's strong fundamentals, the future yield of yuan assets is also expected to lead the world. Foreign exchange financing needs to be cautiously and rationally looking back at the market environment in recent years. Real estate purchase restrictions, frequent P2P ‘thunderstorms’, and the implementation of new financial institution asset management regulations are also accompanied by a series of factors such as inflation. It is increasingly difficult to maintain and increase wealth in such circumstances.

In view of the fact that overseas activities such as travel, study abroad, and business trips are currently subject to many restrictions, foreign exchange financing needs to take into account the exchange rate trend while considering the level of income. Investors should rationally choose investment currencies based on their own asset allocation, and should not proceed blindly with large-scale foreign exchange operations or investments, the Network said.

In related news, Tencent’s QQ.com said there may be a problem because China’s well-known financial commentator 'Lao Man' recently wrote an article to analyze China’s foreign trade data in 2020 and found that about US$400 billion in foreign exchange was of "unknown whereabouts". 

And another Chinese financial commentator " also observed a large amount of foreign exchange outflows.

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