On Friday (November 8), the offshore Chinese yuan (CNH) experienced a significant appreciation against the US dollar, surging by 700 points during Asian trading hours, nearly recovering its post-US election losses. The strong rebound in the yuan's exchange rate was primarily driven by the Federal Reserve's interest rate cut. In the early hours of November 8 Beijing time, the Federal Reserve announced a 25 basis point cut, lowering the federal funds rate to 4.5%-4.75%. Analysts noted that the Federal Reserve delivered the rate cut as expected and adopted a more cautious approach to future monetary policy, which put pressure on the dollar and bolstered yuan assets.
Market sentiment has notably improved, and the rebound of the offshore yuan also led to a more than 16% rise in the FTSE China triple long ETF, reaching a three-week high. With the return of bullish sentiment, investors' interest in yuan asset allocation has increased. Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, analyzed that next year, fiscal stimulus might bring greater market volatility with inflationary reinflation. The terminal rate of the Federal Reserve is likely to peak based on current expectations. Ahmed also pointed out that if inflation pressures and tariff increases caused by trade policy resurface in the future, the Federal Reserve might have to reconsider the necessity of rate hikes.
Moreover, the global macroeconomic environment is also boosting risk assets upward. As the positive effects of the Federal Reserve's accommodative policy continue to ferment, the attractiveness of emerging market assets has increased, with emerging market ETFs generally rising 2.4%, further enhancing market risk appetite. Analysts believe the robust performance of the yuan reflects the market's adjustment of expectations regarding the Federal Reserve's slowing pace of easing, and investors' confidence in yuan assets has increased. The yuan's exchange rate may continue to break upward.
Overall, the Federal Reserve's rate policy and its cautious wording have injected new volatility into global financial markets, and the yuan, as a beneficiary asset, has demonstrated resilient stability. Market participants expect that if US inflation and trade policy factors continue to ferment, the yuan's exchange rate may maintain an upward trend, providing further hedging and investment opportunities for global investors.
