Fed Rate Cut Sparks $14T Yuan Inflow; Experts See 10% Yuan Appreciation
**Preface**
In the current complex and volatile economic climate, the flow of capital is like the surging undercurrents in the ocean of the economy. The slightest disturbance can cause huge waves.
The debt problem of the United States has become a "heartache" for many countries around the world. At this critical juncture, an astonishing 14 trillion dollars of funds have turned their backs on the United States. Following this trend, the appreciation of the Chinese yuan is unstoppable.
Some experts predict that the Chinese yuan may appreciate by 10% to 20%, and even prices may rise significantly in a major trend...
If this continues, where will U.S. debt go? And how high will the Chinese yuan's trajectory reach?
**Federal Reserve Interest Rate Cuts**
On the global economic stage, the Federal Reserve's decision to cut interest rates is like a bombshell, causing waves upon waves. It is important to know that excessive interest rate cuts can lead to increased inflation, currency devaluation, and the expansion of asset bubbles.
Moreover, the impact of the Federal Reserve's interest rate cuts is not limited to the United States; it also affects the global economy. Economies around the world are interdependent, truly a case of "a single move affecting the whole body."
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As early as 2019, the Federal Reserve's decision to cut interest rates was partly due to the slowdown in the global economy and the increase in trade uncertainty, which led to a decrease in economic growth expectations. Therefore, by 2024, the weakening of the U.S. job market is also one of the main reasons for the Federal Reserve's interest rate cuts.This year, the core inflation indicator in the United States has slowed down to 2.8%, marking the smallest increase since March 2021, which provides room for the Federal Reserve to lower interest rates.
It's not just the United States; even major economies such as Europe and Japan have seen a decline in their economic growth rates, prompting the Federal Reserve to take interest rate cuts to stimulate economic growth.
Moreover, the global insufficiency in total demand has severely suppressed the growth of the world economy, which is also one of the important reasons for the Federal Reserve to lower interest rates.
Additionally, the uncertainty of the China-U.S. trade friction has greatly increased the uncertainty of the global economy, leading to a decline in business investment and consumer confidence, which in turn affects economic growth.
Trade uncertainty not only affects the U.S. economy but also has a negative impact on the global economy, causing central banks around the world to take interest rate cuts to respond.
In its statement, the Federal Reserve pointed out that the inflation rate is significantly below the 2% target level, which is also an important reason for lowering interest rates.
In a low inflation environment, the Federal Reserve can stimulate economic growth through interest rate cuts while preventing the risk of deflation.
It can be said that the Federal Reserve's interest rate cuts are a double-edged sword; perhaps they have solved the problem to a certain extent, but at the same time, they have also allowed the Chinese yuan to officially rise...
【Trend of the Chinese Yuan Exchange Rate】
According to forecasts from British hedge funds: with the Federal Reserve lowering interest rates, China may see a return flow of up to $1 trillion in U.S. dollar-denominated assets, which will have a significant impact on the Chinese yuan exchange rate, and it is expected that the Chinese yuan may appreciate by 10%.This viewpoint quickly gained support from other analyses, suggesting that a Federal Reserve rate cut would diminish the appeal of US dollar assets, prompting capital to flow back to China and thereby driving the appreciation of the renminbi.
In addition to the Federal Reserve rate cut, China's economic recovery and the downward trend of the US economy will also affect the renminbi exchange rate. If China's economy recovers well, the US economy achieves a soft landing, and the Federal Reserve does not raise rates or only makes a minor rate cut, the renminbi against the US dollar may fluctuate.
If China's economy continues to rebound, the US economy experiences a hard landing, and the Federal Reserve shifts its monetary policy, there may be a trend reversal in the renminbi against the US dollar.
Recently, the renminbi exchange rate has shown a continuous strengthening trend, approaching the 7.1 mark, and the expectation of appreciation is also continuously strengthening.
The reasons for this are that as the Federal Reserve's rate cut cycle approaches, the appeal of US dollar assets will be eroded, leading to capital flowing back to China and driving the renminbi to appreciate.
The recent decline in the US dollar index, coupled with the impact of the Federal Reserve's dovish rhetoric, has significantly strengthened the renminbi against the US dollar.
China's internal growth momentum has strengthened, and growth expectations have gradually improved, providing solid support for the renminbi exchange rate. Moreover, the domestic economy is stable and improving, with multiple data points exceeding expectations, which also has a positive impact on the renminbi exchange rate.
Stephen Jen, the renowned proponent of the "dollar smile theory," pointed out that the dollar has been overvalued, and the US faces the prospect of twin deficits and a soft landing. These factors could drive the appreciation of the renminbi, and as the interest rate gap between China and the US narrows, the appeal of US dollar assets will be eroded, stimulating a large amount of capital to flow back.
In the case of a US rate cut, if US prices continue to fall, the Federal Reserve may adopt more aggressive rate cuts than the market expects, which will exacerbate the depreciation trend of the dollar and could potentially evolve into an "avalanche."
Therefore, under the "dollar smile theory," it is expected that a US rate cut will trigger a large amount of capital flowing back to China, driving the appreciation of the renminbi by about 10%.【Decreased Appeal of Dollar Assets】
Once upon a time, dollar assets, with their relative stability and high returns, captured the attention of global investors, shining like bright stars in the financial sky. However, times have changed, and the dollar is no longer what it used to be, with its allure gradually diminishing.
The reason for this shift is the rise of emerging economies, which has led to a more diversified range of investment options. Just as "a hundred flowers bloom and the garden is full of spring," investors are no longer solely focused on dollar assets.
Additionally, issues within the U.S. economy cannot be ignored. High fiscal deficits, heavy debt burdens, and the uncertainty of monetary policy have all shaken investors' confidence in dollar assets.
As the saying goes, "A thousand-mile dike collapses from an ant hole." These minor issues accumulate over time, eroding the charm of dollar assets.
Moreover, interest rate cuts can reduce the interest rates on dollar deposits and loans, thereby decreasing the appeal of dollar assets. This leads to an increase in the circulation of dollars in the market, which may cause the dollar to depreciate against other currencies.
From a global perspective, the decreased appeal of dollar assets is also related to the trend of multiple countries promoting settlement in their own currencies. China, Belgium, Luxembourg, France, and other major overseas holders of U.S. debt have recently continued to reduce their holdings of U.S. debt, indicating that global investors' interest in dollar assets is waning.
In terms of market reactions, the continuous decline of the U.S. Dollar Index approaching the "100-point" psychological level also reflects the market's expectations of a possible rate cut by the Federal Reserve. This expectation leads to a decrease in investors' expectations for future economic growth, thereby reducing their interest in holding dollar assets.
【Price Increases to Become a Major Trend】
Recently, the International Monetary Fund (IMF) raised its global CPI forecast for 2024 to 5.8%, expecting that imported inflation will slightly increase. This indicates that the trend of global price increases is quite evident.China's Consumer Price Index (CPI) for 2023 increased by 0.2%, a significant decline compared to the previous year. With the continuous improvement of domestic demand and changes in external price conditions, it is expected that China's price levels will rise in 2024.
In addition, the consumer price index for residents in May 2024 rose by 0.3% year-on-year, indicating a moderate trend of price increases.
Looking at the long-term perspective, the trend of rising prices may continue. A report from the Bank of Japan points out that there is a high likelihood of price increases in the next five years.
In our comprehensive consumer price index in China, there are significant price increases in categories such as tobacco and alcohol, clothing and footwear, dining out, and takeout services.
In the short term, the trend of price increases may remain moderate, but in the long term, as global inflationary conditions change and domestic economic policies are adjusted, price increases may become a major trend. However, the specific trajectory will require dynamic analysis based on actual situations.
【Conclusion】
The wheels of history roll forward. Looking back, the Chinese yuan exchange rate has weathered many storms but has always maintained an overall stable trend.
Looking ahead, we have reason to believe that under the strong resilience of our country's economy and the scientific guidance of policies, the Chinese yuan exchange rate will remain basically stable at a reasonable and balanced level, contributing Chinese strength to the stability and development of the global economy.
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