Economics | 26 October 2022 Analyst certifications and other disclosures on last page. This research report has been created by CCB International Securities Ltd. 1  人民币对美元汇率近期显著走弱，昨天创下2007年一来的最低水平后,今天反弹。强美元是近期人民币兑美元走弱的主要原因。人民币兑一篮子货币指数仍较坚挺。人民币兑美元汇率的下行压力与其他几个亚洲新兴市场货币一致，而明显低于非美元G7货币。中国强劲的贸易顺差继续支撑人民币汇率的基本面。  我们预计中国人民央行将继续容忍人民币兑美元汇率的弹性，避免汇率水平大幅偏离基本面。但同时央行可能继续通过政策指引，人民币对美元中间价和其他政策工具（例如重启逆周期因子等），以防止人民币汇率的过度波动。  在持续的美联储鹰派态势和全球经济增速放缓的背景下，我们预计美元指数在未来3-6个月持续位于高位。但中期仍会随联储加息见顶而走弱。持续的强美元意味着相对弱的人民币。我们预计人民币对美元汇率近期可能在7-7.3区间徘徊。  Until the USD/CNY rebounded today, it had weakened to a level last seen in 2007. US dollar strength has been driving recent USD/CNY weakness. The CNY index remains solid against a basket of currencies. Downward pressure of the renminbi against the US dollar is in line with several other EM Asia currencies, but significantly less pronounced than pressure on non-USD G7 currencies this year. China’s strong trade surplus continues to support renminbi demand.  We expect the PBoC will continue to tolerate greater currency flexibility in order to avoid large currency misalignments. Meanwhile, it plans to reduce excessive volatility through verbal signaling, stronger USD/CNY fixing, and other policy tools, for example, through the formal re-introduction of countercyclical factors in its daily fixing.  We expect US dollar strength to persist in the next three-to-six months as the Fed stays hawkish and as global uncertainty persists. Following this period, we would expect US dollar strength to wane, especially once the Fed hiking cycle draws to a close. Continued US dollar strength is likely to be mirrored by a soft USD/CNY, which in our view is likely to hover within the recent range of 7.0-7.3. Kevin Xie (852) 3911 8241 kevinxie@ccbintl.com Li Cui (852) 3911 8274 cuili@ccbintl.com CCBI SECURITIES | RESEARCH China Economics Update: USDCNY likely to remain weak amid USD strength 中国经济评论：强美元下，人民币兑美元汇率预计持续偏弱 Economics | 28 October 2022 CCBI SECURITIES 2 CNY weakens against the strong USD The renminbi weakened against the US dollar in recent days. The USD/CNY topped 7.3, its weakest level since Dec 2007, before a significant reversal in the past few hours. The spot USD/CNY and its daily fixing widened to 1.6%, pointing to the downward pressure on the renminbi against the dollar (Fig 1). The driver of renminbi weakness has been US dollar strength. The CNY index, measured against a basket of currencies has been quite resilient (Fig 2). Downward pressure of the renminbi against dollar has been in line with other EM Asia currencies such as the Malaysian ringgit (MYR), the Thai baht (THB) and the Philippine peso (PHP), but significantly less than the pressure on non-USD G7 currencies this year (Fig 3 and 4). While the soft domestic growth outlook and the PBoC’s accommodative monetary policy have been a headwind to the currency, trade and the current account surplus have continued to climb, supporting demand for the renminbi. In turn, bearish sentiment and selling pressure on the renminbi has been relatively contained, keeping both well below the levels seen in 2015-2016 (Fig 5). PBoC allows for downward flexibility while sending reassuring signals The PBoC has in general tolerated the flexibility of the bilateral exchange rate and weaker renminbi against the US dollar. While the USD/CNY was stable during the first three weeks of Oct, USD/CNY fixing increased this week, in keeping with the trend of the spot FX rate. In our view, the PBoC does not aim to maintain USD/CNY at a particular fixed level, but instead wants to manage volatility. Regulators have given verbal support for the renminbi and they aim to anchor currency expectations against rapid depreciation. The Required Reserve Ratio was hiked on forward FX sales to increase the cost of selling CNY months ago. In addition, on 25 Oct, the PBoC announced new measures to allow cross-border borrowing by financial sectors. We expect the PBoC will continue to tolerate greater currency flexibility to avoid large misalignments, while still dampening excessive volatility through verbal signaling, stronger USD:CNY fixing, and other potential policy tools, such as the formal re-introduction of countercyclical factors in its daily fixing. USDCNY outlook The US dollar trend remains crucial. Rapid Fed rate hikes have pushed US dollar strength this year. The FOMC aims to contain inflation pressure with front-loaded rate hikes this year after having sat on its hands for most of 2021. However, inflation remains stubbornly high against the Fed’s expectations. Financial markets expect 125-150bp rate hikes to be announced at the Nov and Dec policy meetings, which will bring the mid-point of Fed Funds rates to 4.4-4.6%. Such high Fed Funds rates would be significantly higher than the Fed’s neutral rate estimate of 2.50-2.75%, in