Friday, August 31, 2012

2012 RMB Forex Target: Renminbi Currency Exchange Rate Analysis

As you may know, RMB (Renminbi, Yuan or CNY) moved up +4.6% YoY and closed at 6.29 level against USD in 2011 (year-end), an annual historical high since the RMB currency exchange rate regime reform started in mid-2005. This year-end level of 6.29 represented a 1.14% deviation from our own 2011 USD/RMB target of 6.3628.

Today Mr China publishes our 2012 USD/RMB forex (foreign exchange rate) target value as 6.3282, representing a 0.5% YoY currency depreciation from 6.29 level against USD. It also represents the fact that RMB currency exchange rate has almost attained an equilibrium level in 2012. With reference to our own rating system, the existing USD/RMB forex (foreign exchange) rate of 6.3496 level (as of August 31, 2012) shall be rated "reasonable".

USD/RMB Forex Rate graph

Current USD/RMB Foreign Exchange Rate (Forex) Chart

A few critical factors such as USD index, Euro, China productivity/GDP, China trade balance, China inflation/CPI, etc are considered during our calculations. Our fundamental assumptions are:

(1) We believe Euro shall remain generally weak in 2012 since the global financial market is still waiting for an effective and workable solution to completely resolve the European sovereign-debt crisis. The hope of "completely-resolving" this crisis is quite a mission impossible in the near future because of the systematic issues in formation of Eurozone. After all, Eurozone is the biggest export market for China, contributing approximately 20% of the whole PRC overseas shipment destinations. A weak Euro will relatively impair the competitiveness of Chinese exporters and will unavoidably scale down actual pressure of RMB forex (foreign exchange) rate appreciation.

(2) Although Euro is weak, we do not anticipate that USD index can rally far above its 200-day moving average (80.98 as of August 31, 2012) provided that U.S. keeps on dependency of monetary quantitative easing policy to deal with de-leveraging and economic downturns.

(3) For our own targets of the remaining domestic factors, we have already stated them in our corresponding posts 2012 China CPI target, 2012 China GDP target, and also 2012 China Global Trade Balance target respectively.

Since all these data are suggesting an economic slowdown in China, we believe FDI (Foreign Direct Investment) to China will be dropping and capital outflows from China will also be increasing in 2012, just like other emerging markets (especially India, Brazil, Russia etc). These scientific data also reconfirm with our earlier statement that we do not agree RMB (Renminbi) currency exchange rate is significantly undervalued as claimed by some western politicians. In fact, the previous heavy betting on one-way RMB forex (foreign exchange) appreciation by international forex investors should have already started to ease in 2012. The same as most analysts in financial market, we believe the cool-down of FDI (Foreign Direct Investment) or the rise in capital outflows should only be a temporary problem for China. Based on our present analysis on Chinese economy, we do anticipate an economic soft-landing for China in 2012. Source: Economic Hard Landing Fears or you may use our search boxes within our site to find out more related information about this economic topic we already written before.

This 6.3282 is, however, our first release value of 2012 USD/RMB currency exchange rate target. We may possibly downgrade/upgrade this forex (foreign exchange) rate target later if the above critical factors shall change. Although there has a short-term downside risk in 2012, we remain positive on gradual RMB forex (foreign exchange) rate appreciation in the medium-to-longer term provided that PRC central government persists to continue the RMB (Renminbi) internationalization process as well as its economic opening-up policy.


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