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The Chinese currency might surpass the critical 7-per-USD threshold by the end of the year, supported by a rally in domestic stock markets and ongoing foreign capital inflows, experts suggest. They believe the momentum could be strengthened by a possible Federal Reserve interest rate cut this month and signs of progress in trade negotiations between China and the U.S.
The offshore yuan advanced to 7.1351 against the dollar yesterday, marking a 2.6% increase from a low on April 1, when trade tensions between the two nations intensified. Last week, it already crossed the 7.15 level.
The exchange rate is primarily influenced by two factors: a current account surplus reflecting robust exports and outbound investments, and capital inflows in the capital account, including foreign-funded projects and securities purchases.
Rising expectations for the yuan have encouraged exporters to convert more USD into RMB. In July, nearly 55% of foreign exchange income was settled in yuan, an increase from 46.1% earlier in the year, reaching its highest point since September of last year.
Yuan Might Strengthen Below 7 by Year-End
Financial analysts project the yuan could continue to strengthen, estimating the exchange rate may dip to around 7.1 within the next couple of months and potentially fall below 7 by December.
One prominent bank indicated that the yuan still has room for appreciation, with a forecast of approximately 6.95 by September 2026. The stability is partly attributed to increased offshore settlement by exporters and a pause in tariff negotiations between China and the U.S. that boost market sentiment.
External factors are also at play. The expected cycle of Federal Reserve rate cuts starting this month would narrow the interest rate differential with China, applying downward pressure on the U.S. dollar relative to the yuan.
A senior analyst from Gain Capital Holdings noted that Federal Reserve Chair Jerome Powell has recently adopted a more dovish tone. Additionally, a Federal Reserve governor reinforced support for a rate cut last week, suggesting further reductions could occur within three to six months. The market currently assigns an 85% probability of a rate cut happening in September.
Stock Market Gains Bolster the Yuan
The currency’s strength is also underpinned by a rally in Chinese equities. The Shanghai Composite Index hit 3,888.60 on August 26, its highest in ten years, while the Shenzhen Component Index reached 12,857.16 today, marking its strongest level in three years.
A macro and forex strategist from Barclays pointed out that the yuan’s central parity rate moved to 7.1030 on August 29, the strongest since last October. He also noted that increased hedge fund activity in Chinese stocks contributes to the yuan’s appreciation.
An investment officer from Schroders Fund Management China mentioned that sectors like new consumption categories and exports are performing well. Despite recent volatility, the market liquidity has primarily been driven by reallocations from insurance funds and household savings.
A stronger stock market could further accelerate consumption and bolster investor confidence, leading to a positive feedback loop for the yuan.
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