How will the renminbi fluctuate by end-year?

The renminbi will likely move higher against the dollar and other currencies even if the news-flow for now is not so positive.

According to the Standard Bank, longer-term investor flows are key to how currencies move, not the short-term reaction to the news-flow that comes through the market every day. That’s important when it comes to the renminbi because the newsflow has not been good recently. The Chinese economy is slowing notably at a time when most others, such as the US, have been rebounding strongly. A corollary of this is that monetary policymakers in China seem to have a bias to ease while the Fed, for instance, and many other G10 central banks have a bias to tighten. Trends in the pandemic have also been going against China with cases and restrictions rising while those in most other nations – US included – have been going in a more positive direction.

Given such a positive news-flow for dollar/renminbi, Mr. Steve Barrow, Head of Standard Bank G10 Strategy expected the greenback to soar, perhaps especially given that it has been rising recently against most other developed currencies. But it has not. The dollar is about the same level against the renminbi as it started the year despite rising by over 3% against other major currencies on the DXY index. What’s more, if we look ahead, we think that if the dollar does continue to rise against other currencies, it will still just flatline against the renminbi and, if the dollar falls against other currencies, it will decline against the Chinese currency as well. The key to this view lies not in some sort of expectation that the day-to-day news-flow will improve in China and/or deteriorate in the US. Instead, it is to do with the attractiveness of renminbi assets as perceived by longer-term investors.

The first theme here is the continued rise in the use of the renminbi in areas such as global payments  and global FX reserves. In In Mr. Steve Barrow’s view, these things give the renminbi a solid underpinning, perhaps especially compared to the dollar as the trends here seem to be in the opposite direction. A more tangible factor for investors is the impending inclusion of Chinese bonds in the important FTSE Russell World Bond Index from October. This will see China given the fifth largest weight at 5.25%. Now this inclusion will be phased in over three years and hence there’s no need for investors to rush out and add Chinese bonds to their portfolios. However, that does seem to be what’s happening; something that may be due more to the significant yield pick-up than the impending WGBI inclusion.

So far, the bottom line seems to be that the renminbi will likely move higher against the dollar and other currencies even if the news-flow for now is not so positive. China’s assets are likely to prove sufficiently attractive to maintain heightened interest on the part of investors. However, so far, we’ve talked about bonds; what about equities? For here, there are bigger question marks about attractiveness for foreign investors given that regulators have been cracking down on a number of sectors, such as tech and education, and with the possibility that a more heavy-handed approach continues. This news-flow has hit stocks hard, but interestingly not the renminbi to any great extent. “That may change but our sense is that it will not and that investor apprehension of Chinese assets will stay sufficiently muted to mean that the renminbi will appreciate against the dollar in time with a break of the 6.0 level likely over the next 6-12 months”, Mr. Steve Barrow forecasted.