The midpoint price hits a new low. Should I hold onto my foreign currency for the holiday?

As Non-USD Currencies Begin to Recover, the Renminbi Has Reentered an Appreciation Channel. Just yesterday, the USD to CNY midpoint rate hit a new low since May 2023, at 6.9523, approaching the critical 6.95 level.

Chart: Accelerated Adjustment of the Midpoint Rate

Since the peak of the trade war in April last year, the USD to CNY midpoint rate has been declining for eight consecutive months. It experienced low-volatility consolidation from September to November but ultimately returned to an upward trend close to market appreciation rates. With the Spring Festival approaching, should we still hold foreign exchange for the holidays?

What Is the Rhythm of the Renminbi’s Appreciation?

In December last year, the Renminbi’s appreciation began to accelerate. After appreciating about 900 pips in a single month, January continued to appreciate by 500 pips. In February, before the Spring Festival, corporate FX settlements concentrated, and intraday appreciation volume surged, especially with an increase in forward FX settlements.

Chart: Increased FX Settlement Volume During Intraday Appreciation

If one word were to summarize the Renminbi’s appreciation characteristics, it would be “dominated by us.” During this de-dollarization phase, the US Dollar Index fluctuated between 96-99. When the dollar index fell, the Renminbi gained upward momentum, with a steady downward slope of USDCNY; when the dollar index rose, the Renminbi adjusted slightly, and the rebound space for USDCNY was limited, mostly within 100 pips.

Renminbi Less Affected by the US Dollar Index

It is evident that selling FX on rallies has become a consensus. Companies are abandoning rigid fixed points and choosing to follow trends with flexible adjustments.

Where Are the Risks Before and After the Holiday?

First, the imbalance of supply and demand caused by FX settlement pressure before the Spring Festival. Although the Renminbi appreciated by 300 pips in February, based on the appreciation speed of the past two months, USDCNY could still fall to the 6.9 level. The collective rebound of non-USD assets, especially the rising trend of shadow currencies like the Australian dollar, which has become the strongest currency, has also increased pressure on the Renminbi’s appreciation.

Second, key data catalysts. This Wednesday, the January Non-Farm Payrolls, which was previously absent, will be released, followed by CPI on Friday. With employment and inflation data released in the same week, especially with Friday coinciding with domestic market close, if the data falls short of expectations, the Renminbi could face further appreciation risks amid weak liquidity during the Spring Festival.

Additionally, this Spring Festival holiday will be the longest in history at nine days, containing a carry trade yield of 50 pips. There will also be speculative carry trades around Wednesday, which could increase volatility, and short-term option volatility shows signs of rebounding.

Volatility Begins to Rebound

Summary

(1) The USD to CNY midpoint rate hits a new low, the US dollar index resumes its downward trend, and the Renminbi’s appreciation momentum has strengthened before the holiday.

(2) The appreciation before the Spring Festival may not have ended; key data catalysts and carry trades amplify market volatility. Selling FX on rallies and adjusting positions along the trend at acceptable levels is a reasonable strategy.

Source: Good Morning Forex

Risk Warning and Disclaimer

Market risks exist; investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest at your own risk.