Thursday, August 15, 2013

2013 RMB Target: Renminbi Forex Analysis

Renminbi (RMB in short, or called Yuan or CNY), by definition, means "people's money" in Chinese and is actually the official currency being used by the People's Republic of China (PRC). Since the global financial crisis from July 2008 to June 2010, renminbi forex (foreign exchange) rate was basically pegged to USD. By now, Renminbi (RMB) is pegged to a basket of currencies. It is, however, subject to exchange control and is still not a freely convertible currency especially for cross-border capital accounts.

For your reminder, Renminbi (RMB) appreciated +1.02% YoY and finally closed at 6.23 against USD in end-2012 forex market, another annual record high level since the Renminbi (RMB) foreign exchange rate regime reform began in mid-2005. Such year-end closure level of 6.23 also represented a 1.55% deviation against our own 2012 estimated USD/RMB target of 6.3282.

We, Mr China, now announces our 2013 USD/RMB foreign exchange (fx trading) rate target value as 6.0928, representing a further +2.2% YoY currency appreciation from 6.23 level against USD. Based on our unique rating system, now the USD/RMB current forex trading level of 6.12 (as of end-July, 2013) should then be rated "reasonable".

Forex USD/RMB Currency Rate Chart

Current USD/RMB Forex Rate Graph

What major factors have been considered when we perform this forex forecast for Renminbi? We have taken our estimated China productivity/GDP, Euro, China trade balance, USD index, China CPI/inflation, etc into account of our calculations and have then finalized our results for 2013 after including them into our USD/RMB currency formula. We have also considered some fundamental assumptions, as follows:

(1) We anticipate that USD Dollar Index shall be relatively strong in 2013 amidst U.S. Federal Reserve already planned to exit from its aggressive monetary QE policy (quantitative easing) by this year-end. A relatively strong USD Dollar Index (but not too strong) can undoubtedly help stabilizing Renminbi forex performance against USD. Since we expect U.S. Federal Reserve should have prepared to run this exit strategy super-carefully, we do not think that the USD Dollar Index is going to rally much above its 200-day MA (moving average at 81.5 level as of end-July, 2013) in forex market.

(2) Our team expects Euro should stay generally weak in 2013 under the European sovereign-debt crisis. Eurozone should still take quite some time to resolve the current economic downturns, de-leveraging process in financial markets, as well as the systematic weakness when creating Euro. Bear in mind that Eurozone now contribute about 20% of all Chinese overseas destinations for total shipments and is still the largest export market for PRC (People's Republic of China). A weak currency status of Euro in forex market will hurt the competitiveness of PRC exporters and will then reduce the pressure of Renminbi (RMB) currency appreciation.

(3) The full influence of other major factors are already detailed in our corresponding articles about 2013 China CPI/Inflation target, 2013 China Total Trade Balance target and also 2013 China Productivity/GDP target respectively.

While the whole market is still expecting an economic slowdown in mainland China, we do agree that capital outflows from PRC will remain notable and foreign direct investment (FDI) to China will continue to drop in 2013. Our scientifically calculated 2013 Renminbi target also reaffirms our previous argument that Renminbi (RMB) currency exchange rate is no longer undervalued significantly as claimed by a few western politicians. As Renminbi (RMB) has almost reached its new equilibrium forex trading status, one-way betting on Renminbi currency appreciation by some international investors has become history in forex market. Nevertheless, Chinese economic slowdown is generally under controlled and is still much better than other emerging markets like India, Russia, Brazil etc. In longer term, we are still optimistic about Renminbi (RMB) steady appreciation as long as PRC central government should continue its economic reform opening-up policy and also its Renminbi (RMB) internationalisation planning process.

This 6.0928 should be considered as our initial release value of 2013 USD/RMB forex trading rate target. It is possible that we will upgrade/downgrade it later on, considering any of above Renminbi-related economic factors may change.


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