In 2022, the Fed's balance sheet reduction and interest rate hike cycle was launched, and interest rates rose, driving the US dollar to strengthen. At the same time, the US economy experienced a strong post-pandemic recovery, and the stronger US dollar index was supported by better economic performance than its basket currencies, such as the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, Swiss franc, etc., especially compared with the European region. Finally, the US dollar is favored by funds as a haven tool in the geopolitical landscape, which has promoted the strength of the US dollar.
Data Source: US Federal Reserve
Data Source: IHSMarkit
In 2023, as the Fed's interest rate hike comes to an end, the upside of interest rates is limited. After the sharp interest rate hike in the United States, the economy begins to weaken, and the growth advantage with other economies may decline, and the pattern of dollar strength will change and eventually fall.
In 2022, the domestic economy was disrupted by many events, especially the economic decline in the second quarter, and the real estate capital chain problem caused global concerns about China's economy. In addition, the inflation trend between China and overseas has diverged, meanwhile, monetary policies have also diverged significantly, and the interest rate differential between China and the United States has narrowed to the point of inversion, resulting in capital outflow and CNY depreciation. The CNY is expected to recover in 2023 with the further recovery of China's economy and the possibility of a gradual return of interest rate differentials between China and the United States.
It is worth noting that while the CNY has fallen sharply against the US dollar, the exchange rates of the CNY against other major countries have not fallen so much. For example, as of late November, the appreciations of the exchange rates of EUR/CNY, GBP/CNY, AUD/CNY, and CADUS/CNY were only 2.8%/0.4%/4.3%/6.9% respectively, much less than the USD/CNY, that was 12%. Mysteel believes that the CNY fundamentals remain healthy, and the CNY is expected to strengthen in 2023.
The exchange rate has certain impacts on imports and exports. China is the main importer of copper and the exchange rate appreciation is conducive to imports, pulling down the import profit window, but is stressful to the export of copper products, which is contrary to the trend of increasing domestic copper refining capacity and processing product exports in recent years. Therefore, it is expected that the exchange rate changes in 2023 will put pressure on China's domestic market.
Data Source: Exchange Rates
Data Source: LME, US Federal Reserve
Written by Ting Ao, aoting@mysteel.com
Edited by Paula Xu, xuzhongping@mysteel.com