Recently, the Federal Reserve deliberately signaled another significant interest rate hike, causing the US dollar index to rise continuously, exerting pressure on currencies worldwide. The offshore exchange rate of the Chinese yuan against the US dollar also fell repeatedly, nearly breaking through the 7.0 mark. However, in the past few days, the yuan has surged, not only holding the 7.0 threshold but even breaking through 6.9. This is due to both the strengthening Chinese economy, which is attracting foreign investment, and the Federal Reserve inadvertently shooting itself in the foot. Next, the selling of US treasuries may intensify.

01. Yuan Reverses by 1,300 Pips

Last Wednesday, the offshore exchange rate of the yuan against the US dollar fell to its lowest point at 6.9972, just a hair's breadth away from breaking through 7.0. In fact, on Tuesday, the exchange rate also reached its lowest at 6.9955, but it couldn't quite break through 7.0. The strong pullback at the 7.0 level for two consecutive days indicates that breaking seven is not easy. Subsequently, on Wednesday, the yuan rose by 250 pips, and although it fell slightly on Thursday, it surged by 360 pips on Friday.As of this morning, the exchange rate of the Chinese yuan has returned to 6.86, having increased by over 1,300 points from last Wednesday to the present.

Advertisement

02. Foreign Capital is Bullish on China

The appreciation of the yuan is primarily based on a stable economic foundation.

Since the beginning of 2023, foreign capital has been rapidly flowing into the Chinese market, with the cumulative net purchases by Northbound capital in just the first two months already far exceeding the entire previous year. This behavior of foreign capital fully reflects a long-term positive outlook on China's economic market.

Although Northbound capital experienced net selling for four consecutive trading days last week, the overall trend since the beginning of the year has not changed. Moreover, this morning, Northbound capital has shown a rapid inflow again.

The Chinese market is full of vitality, which is the source of confidence for foreign capital's optimism about China's economy.

The relative attractiveness of the Chinese market, the strong recovery capability of China's economy, and the promotional policies introduced by the government have led foreign capital to successively raise their growth forecasts for China's economy in 2023.

Data already supports foreign capital's optimism about China's economic recovery capability. After the pandemic opened up, the PMI index has significantly improved, offline travel and tourism activities have increased, and real estate sales have warmed up.

As internal and external uncertainties gradually decrease, China's performance in this round of economic recovery, characterized by fast growth, low inflation, low energy burden, and relatively controllable debt risk, continues to boost the confidence of foreign capital participation.

03. U.S. Treasury Sell-offIf we were to describe the conflict between the Chinese yuan and the US dollar as a currency war, then in this war, the United States has inadvertently hoisted a stone only to drop it on its own foot.

Last Friday, a leading US bank suddenly declared bankruptcy. This Silicon Valley bank, akin to a top-tier city commercial bank in China, faced a liquidity crisis due to substantial losses on its investments in US Treasuries and mortgage-backed securities (MBS). Under the pressure of massive withdrawals from its clients, the bank was eventually taken over by US authorities.

Now, this bank has been removed from the S&P 500 Index.

The bankruptcy of a bank that was a constituent of the S&P 500 Index is a clear indication that the financial crisis in the United States is becoming increasingly severe.

More importantly, the direct cause of this bank's bankruptcy stems from significant losses on its previous investments in US Treasuries.

Once this reason is made public, it is likely to trigger a wave of divestment from institutions holding US Treasuries.

In the past two weeks, the yield on US Treasuries has been continuously rising, with the yield on two-year Treasuries even surpassing 5%, and the yield on 10-year Treasuries once again breaking through 4%. This itself indicates that the selling pressure in the market far exceeds the buying power.

It appears that not only has the yuan won this round, but the dollar may have already lost the future.