Back to pre-war positions, the Renminbi stands out alone.

Just one day before Trump’s “final warning” threatened to bomb Iran’s power plants, the USD to RMB exchange rate returned to its pre-war level. USDCNH briefly fell to 6.8550. Compared with Asian currencies like the yen and the won, which are still trading at low levels, the RMB’s performance has been quite impressive.

Chart: The RMB outperformed other currencies

1. The negative impact of the conflict on the RMB is fading

As the Iran–U.S. war continues at this stage, whether it escalates or not, its impact on the RMB is weakening.

First, the RMB is affected least by oil prices. With expectations of the Strait of Hormuz remaining closed for the long term, Brent crude prices have stayed above the $100 level. Central banks once shifted toward more aggressive interest-rate hike expectations, which then evolved into recession expectations. However, signals from China’s monetary policy have remained stable. In the first quarter, under supportive conditions from loose funding, the overnight repo rate actually fell, fluctuations in long-term bond yields narrowed, and the RMB became a safe haven amid the global bond selling wave.

Chart: RMB long-term bond yields stay stable

Second, foreign-exchange supply and demand are still dominated by the real demand from customers rather than sentiment. In the first quarter, the spot plus forward net FX purchases for the month still maintained a scale of 100 billion USD. The war, instead, provided a window for settlement and conversion above 6.90. In the current cautious environment among proprietary desks, customer demand has a stronger impact on liquidity.

Chart: Volatility declines

The RMB’s steady, upward-leaning pattern is also reflected in its unusually calm implied volatility. In addition to a brief spike in implied volatility in early March driven by panic, implied volatility has fallen steadily throughout the month and has already returned to pre-war levels. This means that from the short term to the medium and long term, there is no overly strong expectation of RMB appreciation or depreciation.

2. What to watch next

In last week’s article on why it is so difficult for the U.S. and Iran to reach a ceasefire, we mentioned that the market’s reaction function may also change. One of those factors is that the RMB, as a potential substitute for the “petrodollar system,” has been outperforming other Asian currencies.

Now, the RMB is showing a relative advantage. After Japanese and Korean currencies fell alongside a stock-market plunge, and after Southeast Asian currencies dropped due to the fragility of crude oil, the RMB exchange-rate index reached a new high in more than a year.

Chart: RMB index hits a new high

From this perspective, the degree of RMB strength is already substantial. Unless the war ends earlier than expected, the RMB could still move toward the year’s low point near the 6.80 level; otherwise, short-term adjustments are already in place.

3. Summary

(1) The USD/RMB exchange rate has returned to its pre-war level; as the negative impact of the war gradually fades, sensitivity to the event declines.

(2) Based on the RMB index, short-term adjustments have already been completed, and the likelihood of breaking below the 6.80 level before the war ends is not high.

Source of this article: Good morning FX market

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