Overnight, the US dollar index broke through 103, the yen exchange rate fell below 130 against the background that the Bank of Japan continued to lie flat, and the RMB exchange rate fell below 6.6 for the first time in 15 months.
We have always believed that this round of RMB exchange rate devaluation is not only due to China's factors, but also against the background of a new round of Asian currency war. As shown in Figure 1, the devaluation of the RMB exchange rate since March 2022 has only lasted more than a month, while the devaluation of the exchange rates of other major Asian economies has lasted at least a quarter, far exceeding the current RMB exchange rate. Therefore, in the context of the competitive devaluation of the currencies of neighboring countries, due to the high basket exchange rate, the RMB also needs to moderately release the pressure of devaluation. We believe that the exchange rates of these currencies, especially the future trend of the exchange rates of the Japanese yen and the Korean won, can be regarded as a wind vane of the future trend of the RMB.
The RMB joining the ranks of Asian currency devaluation means that Asia's "currency war" has entered the second half, and it also means that the US dollar has entered a sprint period of appreciation and risky assets have entered a period of turbulence. Before our currency war in Asia It reviews the history of collective devaluation of Asian currencies in history. With the improvement of the marketization of RMB exchange rate, the "currency war" in Asia is divided into the first and second half. In the first half, the yen took the lead in devaluation, leading to the decline of currencies of non Chinese Asian economies (from early 2021 to March 2022); In the second half, the RMB joined the "war situation", and the release of pressure brought market turmoil. Finally, with the bottom of the yen and the stabilization of China's economy, the Asian currency war came to an end (April 2022 -).
In this process, the US dollar index "reaped the benefits" and the risky assets suffered. On the one hand, the yen is the currency with the second largest weight in the US dollar index, and the depreciation of the yen has direct support for the US dollar index; On the other hand, Asia is the engine of the global economy, and the growth dilemma reflected behind the devaluation tide is an important fundamental factor for the appreciation of the US dollar. On Thursday (April 28, 2022), the dollar index stood at 103, exceeding the peak during the outbreak in 2020.
Historically, under the strong US dollar index, commodity assets represented by crude oil performed best, and the stock market performed mediocrely. Especially when the US dollar and US bond yields rose at the same time, the decline was more or less, while the performance of Chinese and American stocks in the stock market was relatively better. The turbulence in the market of non US economies will make funds flow to the United States; Gold prices will bear periodic downward pressure.
There is a trade-off between "depreciation releases economic pressure" and controlling imported inflation. The rhythm of exchange rate depreciation is very important. On the one hand, release the pressure of China's economy and market, and the RMB needs to depreciate; On the other hand, in the face of high commodity prices, the rapid depreciation of the exchange rate will aggravate the uncertainty of imported inflation, and controlling the rhythm of RMB depreciation is more in line with the current policy needs. The central bank's reduction of the foreign exchange deposit reserve on Monday (April 25, 2022) reflects this: the reduction shows the concern about the rapid depreciation of the exchange rate, but it is only reduced by 1 percentage point, indicating that the depreciation direction is still tolerable.
In addition, it is worth noting that the introduction of other policies to control imported inflation may help to improve the central bank's tolerance for devaluation. On Thursday, the Tariff Commission of the State Council decided that the implementation of the provisional import tax rate of zero tax rate on coal from May 1, 2022 to March 31, 2023 is precisely an effort in this regard, which will alleviate the difficulty of the central bank's policy balance to a certain extent - alleviate the pressure of imported inflation and improve the tolerance of devaluation.
Based on the above logic, we believe that the policy response to RMB devaluation may be dynamic. The devaluation cannot be too fast, but it cannot lag behind the major Asian economies such as South Korea and Japan.
As for the impact of RMB exchange rate depreciation on a shares, we believe that it lies in speed rather than direction. As shown in Figure 4, in history, only when the RMB exchange rate depreciates rapidly will its negative correlation with A-Shares increase significantly. In view of the impact of RMB devaluation on A-Shares in the early stage, we expect that even if the currency war in other Asian countries escalates, the pace of RMB devaluation will still be gradually controllable.
Risk tip: the spread of the epidemic exceeded market expectations, and the policy hedging economic downturn was less than market expectations
