US Election Remains Tight, Renminbi Exchange Rate Fluctuates More Significantly: Dollar Weakness, "Trump Trade" Cools Down

US Election Remains Tight, Renminbi Exchange Rate Fluctuates More Significantly: Dollar Weakness, "Trump Trade" Cools DownThe much-anticipated US election has kicked off, and this "most closely contested" presidential election has also impacted the foreign exchange market. On November 5, the Renminbi's central parity rate against the US dollar was set at 7

US Election Remains Tight, Renminbi Exchange Rate Fluctuates More Significantly: Dollar Weakness, "Trump Trade" Cools Down

The much-anticipated US election has kicked off, and this "most closely contested" presidential election has also impacted the foreign exchange market. On November 5, the Renminbi's central parity rate against the US dollar was set at 7.1016, an increase of 187 basis points. Just a day before, both onshore and offshore Renminbi exchange rates against the US dollar experienced significant gains. On November 4, the onshore Renminbi successively recovered the 7.13, 7.12, 7.11, and 7.10 thresholds, rising nearly 500 basis points from the previous trading day. Analysts point out that the recent surge in the Renminbi is attributed to two factors: on the one hand, the volatility of the "Trump trade" has eased market pessimism towards non-US currencies, leading to a pullback in the US dollar; on the other hand, the introduction of China's comprehensive counter-cyclical policies has significantly improved market expectations, attracting capital inflows from overseas, providing stronger support for the Renminbi.

"Trump Trade" Cools Down

On November 4, the Renminbi gained significantly, with both onshore and offshore Renminbi exchange rates against the US dollar rising by over 400 basis points. On November 5, the onshore and offshore Renminbi exchange rates against the US dollar stood at 7.1063 and 7.1098, respectively. Behind this, the US dollar index fell below the 104 mark on November 4. The weakening dollar and the strengthening Renminbi are attributed by analysts to the sudden cooling of the previously intense "Trump trade."

"Affected by fluctuations in the US election campaign and the cooling of the 'Trump trade,' the US dollar index has experienced a significant decline, giving the Renminbi strong passive appreciation momentum, which is the main reason for the recent strengthening of the Renminbi against the US dollar," explained Wang Qing, Chief Macro Analyst at Orient Securities.

For a month prior, the "Trump trade" prevailed, leading to a surge in related assets such as Trump Media & Technology Group, the US dollar index, and cryptocurrencies. However, as latest polls and voting data updated, Harris's campaign gradually gained ground, increasing uncertainty in the US election, causing a certain degree of reversal in the "Trump trade." November 5 was the official voting day for the US presidential election. US media outlets generally believe that the 2024 election is the most closely contested presidential election in recent years. The results of the final opinion poll conducted by the National Broadcasting Company (NBC) before the US election showed Harris and Trump are currently tied in popularity, both at 49%.

Impact of Election Results on the Dollar and Non-US Currencies

What will be the impact of different election outcomes on the US dollar and non-US currencies? Wang Qing believes that in the short term, political factors are overriding economic fundamentals and monetary policy impacts, becoming the key drivers of dollar movements. As the dollar's volatility increases, the Renminbi exchange rate will also exhibit wider fluctuations.

"If Trump is elected President of the United States, the 'Trump trade' will further ferment in the short term, and the surge in the US dollar index will put some passive depreciation pressure on the Renminbi. Trump's trade policy towards China will also exert downward pressure on the Renminbi. If Harris is elected, the Renminbi's appreciation momentum may be further released," Wang Qing pointed out. However, the sustainability of these political influences remains to be seen, and the Renminbi exchange rate is expected to return to fundamental drivers relatively quickly.

Positive for Gold Prices

The US elections situation not only impacts global currencies but also influences financial assets such as gold and Bitcoin. As polls in most pivotal states are neck and neck, uncertainty continues to spread in financial markets. On October 31, the spot gold price hit a record high of $2,789.92 per ounce during trading; subsequently, it experienced a slight decline but remained above $2,730. On November 5, spot gold continued its narrow range of fluctuations from the previous trading day, closing at $2,739 per ounce.

Bitcoin, which Trump has consistently supported, has recently experienced significant fluctuations. In late October, Bitcoin reached a high of over $74,000, but it has since retraced, falling below $73,000 and then $71,000 in early November, reaching a low of $67,000. As of 6:00 PM on November 5, Bitcoin was trading at $68,776, a decrease of 3.3% over the past seven days.

Based on past experience, the "Trump trade" has historically shown high certainty for US bond yields rising, the dollar strengthening, and Bitcoin rising. The expectations incorporated into the "Trump trade" are relatively stronger for US equities, bonds, the dollar, and gold, while the impact on oil prices is uncertain. Trump's proposed economic policies could potentially add $7.5 trillion to $15.2 trillion in debt to the US, which would represent a greater fiscal burden than Harris's proposed economic policies (adding $3.5 trillion to $8.1 trillion in debt). This implies that market concerns about the sustainability of federal finances will intensify, leading to a reduction in US bond holdings and directing capital into the gold market, providing support for gold prices.

Furthermore, Trump's policy mix, including tax cuts and aggressive trade tariffs, is more likely to fuel US inflationary pressure. As gold possesses inflation-hedging properties, it will also be positive for gold prices.

Ming Ming, Chief Economist at CITIC Securities, stated that overall, regardless of whether Trump or Harris takes office, it may not be good news for domestic investors' risk appetite. However, in terms of asset performance, the key lies in whether domestic policy intensity can offset the impact of the new US president's inauguration. Regarding gold, factors such as interest rate cuts, sticky inflation, turbulent geopolitical situations, and the intensity of US fiscal spending are all bullish for gold prices, making gold potentially the most certain commodity in the next phase.

Strong Foundation for Renminbi Exchange Rate Stability

It's important to note that the "Trump trade" is not the determining factor in the Renminbi's exchange rate fluctuations. During the period of rapid US dollar appreciation in October, the Renminbi exchange rate demonstrated remarkable resilience, also benefiting from the continuous implementation of China's comprehensive incremental policies, further improving global market expectations for China's economic recovery.

In Wang Qing's view, driven by the introduction of comprehensive incremental policies in the early stages, although the Renminbi has depreciated against the US dollar since October, the CFETS and the other three basket indexes of Renminbi exchange rates, representing overall exchange rate levels, have shown a trend of steady growth. The Renminbi is receiving stronger support, which also played a positive role in the Renminbi's strengthening over the past two trading days.

While the US election's close contest will be a factor influencing the foreign exchange market, looking forward, the Renminbi exchange rate will continue to fluctuate bidirectionally around a reasonable and balanced level. Zhou Maohua, researcher at the Financial Market Department of China Guangfa Bank, pointed out that short-term uncertainties in US and European political elections will inevitably cause some disruptions to the Renminbi exchange rate, but ultimately, Renminbi exchange rate stability hinges on domestic fundamentals. Supported by robust domestic economic recovery, resilient foreign trade, and enhanced attractiveness of Renminbi assets, the Renminbi exchange rate enjoys a solid foundation for stability.

"The persistence and magnitude of fundamental improvement will become important internal factors influencing the Renminbi exchange rate," Ming Ming also stated. In the short term, the Renminbi exchange rate may experience heightened volatility during the US election, but the People's Bank of China has ample tools to stabilize the exchange rate, helping to prevent significant unilateral fluctuations in the Renminbi.

As Li Hongyan, Deputy Director of the State Administration of Foreign Exchange, said at a recent press conference held by the State Council Information Office, the Renminbi's spot exchange rate against the US dollar has generally depreciated slightly by about 0.3% this year, experiencing some downward and upward movements within certain periods, all in line with changes in the internal and external environment. Meanwhile, compared to other currencies, the Renminbi's performance in the global foreign exchange market has been relatively stable. Fluctuations in the Renminbi exchange rate are both normal and moderate.

Wang Qing forecasts that as the initial stage of the US Federal Reserve's rate cut cycle is underway, the probability of sustained significant gains in the US dollar index is relatively low. Meanwhile, China's comprehensive incremental policies are still being implemented, and economic growth in the fourth quarter is expected to pick up noticeably. From this perspective, although the Renminbi will maintain an inverse relationship with the US dollar in the coming period, the likelihood of significant weakening in the fourth quarter is low, and it will remain relatively strong compared to other non-US currencies.

Beijing Business Daily Reporters Yue Pinyu and Dong Hanxuan