Stimulus, trade surplus seen as key to stable RMB

While the renminbi's exchange rate against the US dollar continued to head south amid expectations of further interest rate hikes by the Federal Reserve, the Chinese currency can be stabilized leveraging China's significant trade surplus and stimulative economic policies, experts said.

The onshore RMB spot exchange rate against the greenback dropped 500 basis points to close at 6.92 on Monday, while the offshore rate reported a 300 basis point daily decline to breach 6.93. The median price quoted by the China Foreign Exchange Trade System on Monday was also lowered by 212 basis points to 6.8698, the lowest in two years.

This was only about a week after USD/CNY touched a 23-month low by dropping below 6.8 on Aug 22.

With the decline on Monday, the renminbi has dropped 7.75 percent against the greenback so far this year.

This is mainly due to a stronger US dollar, said experts. The US dollar index touched 109.4 intraday on Monday, setting a two-decade record. The US dollar has gained more than 13.8 percent so far this year.

The hawkish message that Jerome Powell, chairman of the Fed, delivered at the Jackson Hole meeting on Friday has sent the dollar rallying, said Ipek Ozkardeskaya, senior analyst for Swissquote Bank.

While saying that the Fed will use the tools "forcefully" to tame inflation, Powell also indicated that further interest rate hikes should be expected even though it may cause some "pain" to the US economy.

The dollar bulls now eye the 110 level on the back of a solid divergence between the decidedly hawkish Fed but increasingly worried other central banks, said Ozkardeskaya.

Major currencies fared weakly against the US dollar on Monday. The Japanese yen slipped to 138 on Monday, approaching the lowest since July 15. The euro stayed below parity against the US dollar to close at 0.9995 on Monday.

Cheng Qiang, chief macroeconomic analyst from CITIC Securities, said external pressure led by the rising US dollar will exert the strongest depreciation pressure on the renminbi in the short run. But USD/CNY will likely remain around 6.7 to 6.9 by the end of this year.

Wang Youxin, senior analyst from Bank of China, said inflation is expected to contract in the US in the fourth quarter and any fresh interest rate hikes by the Fed would be moderate, not steep. The stress on non-US dollar currencies will be thus alleviated by then.

Favorable fiscal and monetary policies that China introduced earlier this year will make a bigger difference in the following months, which will help stabilize the RMB exchange rate, he said.

While admitting an inverted China-US interest rate spread may exert some downward pressure on the Chinese currency, Guan Tao, chief economist of BOC International, said that the RMB exchange rate will remain stable given China's significant trade surplus, abundant foreign exchange reserves and prudent macroeconomic policies.

Data released by the General Administration of Customs on Aug 7 showed that China's trade surplus hit a record high of $101.3 billion in July, with the figure for the first seven months of the year surging 61.6 percent year-on-year to top $482.3 billion.

Given the large amount of outstanding foreign exchange funds accumulated by enterprises and household accounts, as well as the stratospheric trade surplus, the RMB exchange rate will undergo only a moderate adjustment in the short term, said Zhao Wei, chief economist of Sinolink Securities. The overall depreciation pressure on the RMB is controllable, he said.