South African rand could rally renminbi’s rising tide

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– ZAR tests July 2019 highs as renminbi climbs to 3-year highs
– But further gains from CNH could raise the global tide against the USD
– Raising other currencies from Asia and Europe to Africa, including ZAR

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The rand tested new multi-year highs against the dollar and weighed on the GBP / ZAR on Tuesday as the Chinese renminbi pushed the USD / CNH to its lowest level since June 2018 in developments that could indicate further gains ahead for South African exchange rates.

The South African rand pushed the USD / ZAR exchange rate into a further test from the 13.80 level lower on Tuesday, its lowest since July 2019, while weighing heavily on the pound-rand exchange rate in the process.

The rand’s gains came alongside the strengthening of the euro’s strength and the generalized weakness of the dollar’s exchange rates, all building up as the renminbi pushed the USD / CNH exchange rate below the historic level of 6.40 which had proved before and three times this year insurmountable. obstacle for Chinese currency.

Chinese State Council said last week at its weekly meeting that China will work to secure the supply of raw materials and keep prices stable. This is the second week in a row that the Chinese State Council has expressed concern over the recent rise in commodity prices, ”said Tommy Xie, Greater China Research Officer at OCBC Bank in Singapore.

GBP ZAR CNH

Above: GBP / ZAR, USD / ZAR and USD / CNH falling together at hourly intervals.

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There was no obvious catalyst for Tuesday’s move below 6.40, although it comes amid growing concern in Beijing over the impact of rising dollar-denominated commodity prices on the production costs of Chinese companies.

It also follows a suggestion made last Friday by a senior researcher from the People’s Bank of China (PBOC) that the bank State Administration of Foreign Exchange (SAFE) “appropriately appreciates the RMB” via a lower USD / CNH exchange rate in order to limit the impact of rising commodity prices on businesses and society as a whole.

“Let’s see if the USD / CNY can drop below the 6.40 / 41 area in the next few weeks (we’re generally doing like a weak dollar environment this summer),” says Chris Turner, Global Head of Markets and Head of EMEA research at ING, in a note to customers last Friday.

The rand has always had a positive correlation with the Chinese yuan, the currency of South Africa’s largest trading partner, although the relationship has grown stronger this year, with the rand often rising at the same time but further and faster than the renminbi.

USD ZAR GBP CNH

Above: USD / ZAR, GBP / ZAR and USD / CNH together fall under a key USD / ZAR trend. ZAR / USD and CNH / USD also shown.

Because of this correlation, any strength in the renminbi tends to have a positive influence on the rand anyway, although it may also be very relevant here that the current policy of the PBoC against the renminbi is to ‘maintain the basic stability of the RMB exchange. rate at a reasonable and balanced level. “

“Our charter [below] shows the highest correlations with the Singapore dollar – because the Monetary Authority of Singapore formally manages the SGD against a basket of currencies in which the CNY will have significant weight. The South African Rand also pays a lot of attention to the movement of the USD / CNH, ”adds Turner of ING.

The PBoC’s exchange rate policy could have important implications for the Rand and a range of other currencies and due to more than just a correlation if a decision is made to go ahead and “appreciate”. correctly ”the Sino-US exchange rate.

ING RMB correlations

Above: ING Group chart showing the correlations of different currencies with the renminbi.

This is because any sharp drop in the USD / CNH would cause the trade-weighted yuan exchange rate to rise sharply, i.e. the renminbi measured against the currencies of China’s major trading partners, otherwise known as the Chinese Currency Exchange System (CFETS) basket.

“The People’s Bank of China has developed a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies,” Liu Guoqiang, vice president of the PBoC, in response to questions from the media.

“The People’s Bank of China will focus on the expected directions, play the role of macroeconomic stabilizer and automatic balance of payments adjustment of the exchange rate, and keep the basic stability of the RMB exchange rate at a reasonable level.” and balanced, ”adds Guoqiang.

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GBP / USD forecast 2021

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Provider: Global reach
Type: Free download
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The trade-weighted yuan, or renminbi measured against the CFETS basket, was already at three-year highs even before the USD / CNH started to fall below the 6.40 handle, although the latter move would now raise other renminbi exchange rates unless the PBoC takes action to stabilize or reduce them in some other way.

Achieving stability in other renminbi exchange rates – especially if a compensatory reduction in other exchange rates is sought – would require a PBoC offer for other components of the global CFET basket that covers currencies from Europe and Europe. Asia to Africa, including the South African Rand.

Encouraging other parts of the CFETS basket to outperform the renminbi would actually cause the yuan to fall against those other currencies and in doing so could help keep the overall renminbi stable “at a reasonable and balanced level.”

In other words, it is certainly very possible to say at the very least that the recent slowdown in the USD / ZAR and the upward trend in South African exchange rates could be supported by an offer from the PBoC for how long such a thing is mutually beneficial to both economies. concerned.

“It is also interesting to see the strong correlation between EUR and CNH. Yes, you can say that the PBoC also manages the CNY against a basket of trading partners where the euro has a significant weight. But if we see an independent downward movement in USD / CNH as the market offers the PBoC to provide a stronger currency to fight import prices – stable correlations suggest that the EUR / USD would recover at the same time. Such a move would bolster our year-end EUR / USD forecast of 1.28, ”said ING’s Turner.

Final graphic

Above: USD / ZAR at weekly intervals with Fibonacci retracements of 2018 uptrend, 2011 trendline and GBP / ZAR (blue), USD / CNH (green).

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