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Citic Securities Research article | Yang Fan Maxi Gaowa Wang Ximing

Since the beginning of 2024, the RMB exchange rate has maintained a stable and weak operation, and has depreciated by 1% against the US dollar as of April 19.Slotswelcomebonusnodeposit.97%. The main reason is that US employment and inflation data exceeded expectations, which led to the cooling of Fed interest rate cut expectations and the strengthening of the dollar index. The Federal Reserve is expected to cut interest rates only once or so this year, and the ECB may take the lead in cutting interest rates. The widening interest rate gap between the United States and Europe will support the strength of the dollar, thus putting depreciation pressure on the RMB. However, we believe that the central bank has sufficient foreign exchange management tools this year and is willing and able to maintain exchange rate stability, and even a small depreciation in the second and third quarters of this year will not exceed 7.35.

Since the beginning of ▍ in 2024, the RMB exchange rate has remained stable and weak, with a cumulative depreciation of 1.97% against the US dollar as of April 19.

The exchange rate of the US dollar against the RMB was 7.10 at the end of 2023 and depreciated to 7.24 on April 19, 2024, mainly due to the strong strength of the US dollar. Of course, the domestic economic recovery is also unstable. Overseas, the persistence of US inflation remains unresolved, with employment and CPI data exceeding expectations again in March. Market expectations for the number of interest rate cuts and the extent of interest rate cuts by the Federal Reserve this year have been continuously revised down, and fears of "secondary inflation" in the United States have also intensified. On the domestic side, the overall economy is running smoothly, prices are weak or reflect hidden worries on the demand side, and economic data in the first quarter of 2024 show that the relative shortage of effective demand in the domestic economy is still prominent. Since April 2024, the RMB exchange rate "midpoint-FOB" scissors difference and "FOB-FOB" scissors spread have expanded, and the implied exchange rate of gold has reached about 7.35, indicating that the depreciation pressure of RMB has increased.

▍ expects the Fed to cut interest rates only once this year, and the ECB may be the first to cut rates in June, and the widening spread between the United States and Europe will support the continued strength of the dollar.

The US economy is resilient, and recent CPI data show signs of marginal warming in inflation, and Fed officials have also made hawkish statements, and we expect the Fed to cut interest rates only once or so this year. Inflation and employment in the euro zone are both cooling, and we expect the ECB to cut interest rates in June, ahead of the Federal Reserve. And the ECB is likely to cut interest rates about three times a year, more often than the Fed. Historically, the trend of the dollar index is highly correlated with the spread between the US and Europe, so the spread between the US and Europe is likely to continue to support the strength of the dollar after the interest rate cut in the euro zone.

▍ expects that the devaluation pressure of the RMB will remain in the second and third quarter, but the room for devaluation is limited and will not break through 7.35.

Since August 2023, we have observed that the people's Bank of China has paid more attention to exchange rate stability and used a variety of foreign exchange management tools to maintain the stability of the RMB. The sudden devaluation of the renminbi on March 22 caused the Shanghai Composite Index to fall nearly 2 percent in intraday trading, proving that exchange rate stability is critical to financial markets. Although we expect the dollar to remain strong this year, the pressure may not be as extreme as last year. In September 2023, under the conditions of 5% interest rate on US debt, 107 US dollar index and 7.7 implied exchange rate of gold, the exchange rate of US dollar against RMB was kept within 7.35. We believe that the central bank also has the will and ability to maintain exchange rate stability this year, and even a small devaluation will not exceed 7.35. Of course, considering that the interest rate cut in the United States may be delayed and the domestic economic growth exceeds market expectations in the first quarter, the probability of China's MLF interest rate cut may decline in the near future, but it is still possible to cut reserve requirements and deposit interest rates.

▍ macro operation tracking: the growth rate of GDP in the first quarter exceeded market expectations, the effect of industrial policy is significant, and momentum conversion is still the main line.

GDP grew 5.3 per cent year-on-year in the first quarter of 2024, higher than Wande's consistent forecast (4.9 per cent) and a quarter-on-quarter growth rate of 1.6 per cent, significantly higher than the trend line (about 1.2 per cent). The quarter-on-quarter growth rate is higher than the previous quarter, related to the slowdown in the slope of recovery in the fourth quarter of 2023, but the average growth rate in the two quarters also reached 1.3%. Structurally, the characteristics of the conversion between new and old kinetic energy are still obvious, but the temperature difference between them converges slightly. Regional differentiation is also gradually emerging, the recovery of second-tier cities and third-and fourth-tier cities is better than that of first-tier cities, and the physical workload of infrastructure construction in debt provinces is obviously weak. On the production side, the industrial recovery has slowed down under the drag of insufficient demand, the recovery of the service industry has accelerated, and the contact agglomeration service industry and modern service industry, which are closely related to cultural and tourism consumption and residents' travel, are growing rapidly. On the demand side, the growth rate of fixed asset investment accelerated, manufacturing investment continued to strengthen driven by equipment upgrading and profits rebounded, infrastructure investment slowed slightly but still resilient, and real estate investment fell. The momentum of consumption growth is stable, and service consumption is stronger than commodity consumption. Based on the economic growth in the first quarter, it is expected that the Politburo meeting will focus more on industrial development and scientific and technological innovation. Economic data were released in the first quarter of last week, and this week's domestic data window focused on the impact of overseas data on market expectations.

▍ risk factors:

The recovery of domestic demand is less than expected, domestic policy is lower than expected, overseas recession and risk events are higher than expected, overseas monetary policy is higher than expected, and so on.