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Location: Home > NEWS > The first year of interest rate hike by the Federal Reserve-- the Prospect of G7 and RMB Exchange rate in 2022. 

The first year of interest rate hike by the Federal Reserve-- the Prospect of G7 and RMB Exchange rate in 2022. 

发布时间:2021.12.29

The first year of interest rate hike by the Federal Reserve-- the Prospect of G7 and RMB Exchange rate in 2022. For more information on export to China, please call SINOLOBEN, service Email: sinoloben@sloben.com.


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In 2021, the global economy will still be plagued by the COVID-19 epidemic. The continuous variation of the virus has kept the epidemic in a phased outbreak, while the uneven distribution of vaccines has also affected some developing countries, disrupting global supply chains, soaring raw material prices and thwarting economic recovery. Against the backdrop of high inflation, the Fed began to shift its loose monetary policy from June. The Fed officially began to scale back its bond purchases in November, announced an accelerated narrowing in December, and expected to raise interest rates three times in 2022. Under the dual logic of risk aversion and monetary policy differentiation, the dollar strengthened across the board in 2021.



Although new mutations may still occur in novel coronavirus in 2022, the impact of the epidemic on economic activity is expected to diminish, given the increased popularity of vaccines in developing countries and the acceleration of vaccination in developed countries. Under the assumption that the impact of the epidemic is gradually weakening, global economic demand is expected to return to the upward track, and changes in monetary policy may become the main line of foreign exchange market transactions in 2022. Among them, the Fed's policy is undoubtedly the top priority. Based on the Fed's latest bitmap and projections of the trading level of the interest rate derivatives market, we expect the Fed to start raising interest rates in the second quarter of 2022.


Under our baseline assumption, the exchange rate market in 2022 is expected to take the start of the Fed rate hike cycle as a turning point. We expect the dollar index to continue to appreciate in the first half of 2022 and break through 2021 highs, but after the start of the interest rate hike cycle, the dollar index may change from rising to falling and fall back below 95 in the second half of the year. The hub of the euro against the dollar is expected to recover to 1.14. Historical experience is basically consistent with our judgment. In the past four Fed rate hikes, the dollar index tends to rise within six months before the rate hike and fall within six months after the rate hike. It is somewhat surprising that the Japanese yen is the major currency with the largest average increase in the six months after the start of the Fed's interest rate hike, and can rise by about 10% against the US dollar on average after raising interest rates. This is contrary to the current logic of the market that the Fed's interest rate hike has led to a widening of the spread between Japanese and US interest rates and the depreciation of the yen. We believe that it is precisely because the market bears on the yen are too consistent that the bears of the yen will accumulate before the Fed raises interest rates, and under the influence of the effect of "buying expectations and selling facts", the start of the Fed raising interest rates has become an opportunity for yen bears to settle. We expect the yen to rebound to 107 by the end of 2022, which is stronger than the market consensus.


The bilateral exchange rate appreciation of the RMB against the US dollar against the backdrop of the overall rise in the US dollar index in 2021 has pushed the CFETS index, which measures the rise and fall of the renminbi against a basket of currencies, to its highest level since the exchange rate reform in 2015, and the real effective exchange rate index calculated by the Bank for International Settlements hit an all-time high in November. Strong epidemic control has enabled Chinese export manufacturing companies to reap huge dividends in 2021, when the global supply chain has been devastated by the epidemic. The 30% increase in exports has brought a large amount of demand for foreign exchange settlement, which is the main reason for the RMB to rise against the trend and move out of the independent market in 2021. In 2022, our baseline assumption is that the impact of the epidemic is gradually weakening, and the high growth of China's exports is difficult to sustain in an environment where global monetary policy tends to tighten. Once export growth slows down, there is a need to repair the valuation of the RMB effective exchange rate. We expect a moderate correction of the RMB in 2022, which will be around 6.65 by the end of the year.


Among the remaining G7 currencies, we expect the sterling and Canadian dollars to reach around 1.38 and 1.23 respectively by the end of 2022, as both the Bank of England and the Bank of Canada have strong expectations of raising interest rates in 2022. There is a divergence in monetary policy between the Australian Federal Reserve and the Federal Reserve in the first half of 2022, and monetary policy may converge in the second half of the year. We expect the exchange rate of the Australian dollar to be 0.75 by the end of 2022. Finally, the Swiss franc, together with the euro, is expected to strengthen in the second half of 2022, and we expect the US dollar and Swiss franc to be 0.92 by the end of 2022.
            

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