The Overvaluation of the U.S. dollar and the Depreciation of RMB

September 30, 2022

Since 2022, the RMB exchange rate has depreciated by 11%, and the US dollar index has appreciated by 16%. In the first quarter of 2022, the U.S. current account deficit will account for more than 4% of gross domestic product (GDP), an increase of 1.3 percentage points from the same period in 2021. It appears that the US dollar index has become significantly overvalued.

Federal Reserve Chairman Powell announced another 75 basis points of interest rate hikes in the September interest rate meeting statement, using the term "sufficient restrictive level" for the first time to replace the original "restrictive level" expression, further strengthening the Fed's hawkish stance against inflation . In the short term, the Fed's tightening monetary policy will not turn, and the policy of raising interest rates will still support the US dollar index.

Theoretically, a country's exchange rate movements should be related to the country's economic fundamentals.

The main reason for the relative strength of the RMB exchange rate in the first half of the year was strong exports. In 2022, China's exports have repeatedly exceeded market expectations, with new energy-related industries such as photovoltaics and automobiles performing particularly well. In the process, the productivity of China's manufacturing industry has increased significantly, which has greatly boosted the competitiveness of exports, and the share of exports has exceeded historical extremes. Coupled with the decline of Chinese residents going abroad, the service trade deficit has also decreased. The current account surplus in the first half of the year provided some support for the RMB exchange rate.

However, in the second half of the year, there was downward pressure on exports, and the Chinese economy also experienced some unpredictable shocks during the transition from recession to recovery. The overall economy was hovering at a low level, making it difficult to sustain a recovery.

Fundamental expectations are not good, domestic interest rates are under downward pressure, overseas interest rates are still rising, and the depreciation pressure of the RMB exchange rate is rapidly increasing. We expect that the RMB exchange rate will still depreciate to a certain extent in the short term, but it will enter an appreciation channel in the middle of next year.

Overally speaking, the depreciation of RMB should have a positive impact on all exporters like TailorMax Stockloter in China.

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