In recent weeks, substantial shifts in the value of the Chinese RMB against the US dollar have caught the attention of international marketsOn October 16, during early trading in the Asia-Pacific region, the onshore RMB slid to 7.1177 against the dollar, hitting an intraday low of 7.125. This marked the weakest level since September 10. The central parity rate reported the same day was 7.1191, also the lowest observed since September 12. These developments highlight a significant turn of events for the Chinese currency, which had previously enjoyed a period of relative stability.

The RMB began its downward trajectory more pronouncedly on October 15, when it dropped sharplyBy 7:30 PM Beijing time, the offshore RMB had dipped below 7.12, reaching a low of 7.1343 during the day—representing a substantial 300-point decline, among the largest drops recorded this yearThe onshore RMB similarly fell over 350 points, showcasing the volatility permeating the currency market at this juncture.

This newfound volatility is reflective of broader economic currents, with analysts attributing the shifts to a combination of geopolitical tensions and domestic economic policies

Senior strategist Xing Zhao Peng from ANZ Bank indicated that recent stimuli aimed at revitalizing the Chinese economy have played a pivotal role in these fluctuations, suggesting a direct relationship between fiscal measures and currency stability.

Current forecasts indicate that the RMB may continue to grapple within a range of 7.00 to 7.12 against the dollar moving forwardAnalysts at CICC noted that external pressures, particularly from the US dollar's strength and shifting interest rates, continue to influence the currency's fateThe current sentiment regarding China's economic data for the third quarter and for September appears cautious, suggesting limited optimism unless new supportive policies are anticipated.

Further complicating the landscape, geopolitical strains are entering the equation, as pointed out by Sun Wu, chief financial market analyst at Mitsubishi UFJ Bank in China

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The current market environment is influenced by predictions regarding which political party—Democratic or Republican—will gain the upper hand in upcoming elections, and what that could mean for trade relations with China.

In a report released on October 14, Chris Weston, head of research at Pepperstone Group Ltd., remarked upon the heightened levels of volatility within the forex options market, with dramatic fluctuations observed across various currency pairs, including the RMB, the Mexican peso, and the euro against the dollar.

Weller, the global research head at Gain Capital Group, pointed out that the initial stages of policy implementation for tariffs often tend to favor the dollar while putting emerging market currencies, including the RMB, under pressureFurthermore, there has been a cooling off in market expectations regarding potential interest rate cuts by the US Federal Reserve—another factor pressuring the yuan

This cooling stems from robust employment data alongside rising inflation rates, leading to speculation that dramatic rate cuts may not be on the horizon.

September job additions in the US exceeded forecasts, with a reported increase of 254,000 compared to the anticipated 150,000. Additionally, the Consumer Price Index demonstrated a year-over-year increase of 2.4%, surpassing expectations of 2.3%. Amid this backdrop, Goldman Sachs has reduced the probability of a US recession in the coming year to just 15%.

Looking ahead, Weller anticipates that the RMB will likely experience considerable volatility within the 7.0 to 7.3 rangeMeanwhile, UBS adjusted its end-of-2024 forecast for the RMB against the dollar to 6.95 from an earlier prediction of 7.10. However, the bank cautioned that if market expectations surrounding US interest rate cuts or government policy support in China fluctuate, the RMB could face renewed pressures to depreciate.

Two crucial elements significantly affecting currency markets are the current account and capital account

Regarding export performance, Xing Zhao Peng has noted potential waning growth, driven largely by softening within the semiconductor sectorRecent data from customs indicated that China's exports and imports in September amounted to 3.75 trillion yuan, reflecting a year-over-year growth of merely 0.7%, a 4.1 percentage point decline compared to the previous monthMonth-on-month comparisons of exports and imports reveal a slowdown, with growth rates of 1.6% and a decrease of 0.5%, respectively.

Analysis from the General Administration of Customs suggests that the slowdown in export growth during September is largely a normal fluctuationThe initial analysis attributed this to several short-term factors, including last year’s high export volume levels, disruptions caused by typhoons in the Yangtze River Delta region leading to shipping delays, and recent struggles in global shipping logistics affecting container availability.

From the perspective of capital inflows, Xing Zhao Peng predicts a balanced influx of foreign investment into China, with minimal volatility expected in both bond and stock market flows

Citing tight bandwidths for international bond yields and predictions of slower interest rate cuts in the US, potential shifts in stock investments seem less likely as foreign investments slow their entry into China's stock market.

Goldman Sachs has observed that capital flowing from the Middle East to emerging markets is on the rise, indicating a strategic shift that could compensatively support foreign investments that might have been vacated by other investorsThe bank also holds a bullish outlook for China's stock market, estimating potential upside of 14% and 15% over the next 12 months for MSCI and the CSI 300 index respectively.

As of October 15, the recent quarter-end shareholder data from northbound investments reveals significant holdings of 13.23 billion shares across A-share companies, with a total market value of 2.41 trillion yuan—an increase from pre-reporting periods, evidencing an upward trend in this investment sector.

For a more concerted forecast regarding the future trajectory of the RMB's value, analysts suggest that a comprehensive macro perspective should prioritize the fundamental dynamics between China and the United States, along with the evolving landscape of interest rates between the two economies