First, the expectation of a Federal Reserve rate cut plummeted, and now the U.S. retail data has added fuel to the fire. The U.S. dollar index has been climbing steadily, breaking through the 106 mark, leading to a significant shock for non-U.S. dollar currencies.

On Monday evening (April 15th) Beijing time, the U.S. retail sales data for March showed that retail sales, unadjusted for inflation, increased by 0.7% compared to February, reaching a new high since September last year. The Japanese yen and South Korean won both hit new lows in phases. On the 16th, the renminbi's central parity rate against the U.S. dollar entered the 7.1 range for the first time since March 22nd. As of 16:30 that day, the U.S. dollar/onshore renminbi was quoted at 7.2396, down 11 points from the previous trading day. The U.S. dollar/offshore renminbi once broke through the 7.28 mark, and was quoted at around 7.2705 at around 17:00.

Several investment banks stated after the data release that the Federal Reserve funds futures market has reduced its expectation for the interest rate cut this year to 45 basis points (BP), with a 60% probability for the first rate cut in September, while the expectation for the rate cut at the beginning of April was 68 BP. The path to reducing inflation in the U.S. will be tortuous, and it seems that a rate cut is not necessary for the U.S. economy to maintain growth this year.

U.S. retail data stirs the global foreign exchange market

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The latest U.S. retail report, which was better than market expectations, reflects the continued strength of the U.S. economy. The report shows that total retail sales increased by 0.7% month-on-month in March, and the data for January and February were revised upwards.

Specifically, the rise in gasoline prices has driven the overall increase in retail sales. At the same time, the core retail sales growth, excluding automobiles, petroleum, building materials, office supplies, mobile homes, and tobacco, also reached an unexpected 1.1%, mainly due to strong online sales.

UBS told reporters that core retail sales are directly related to the calculation of GDP, so the rise in this set of data has also led the Atlanta Fed to raise its GDPNow model forecast. The model currently predicts that the U.S. GDP growth rate in the first quarter will be 2.8% year-on-year, while last week's forecast was 2.4%.

"We believe that the path to reducing inflation will be tortuous. One of the Federal Reserve's main concerns at present is that strong consumer demand and wage growth have led to high inflation in the service industry. We expect that although the economy still has resilience, a slowdown in growth will help to cool consumer spending. Therefore, we maintain our expectation of two rate cuts this year, each by 25 basis points," said UBS.

Just last week, the U.S. March CPI inflation data far exceeded expectations, and Goldman Sachs pushed its expectation for the first Fed rate cut from June to July, while UBS adjusted it to September. At that time, the U.S. dollar index approached 105, and the 10-year U.S. Treasury yield soared and broke through the 4.5% mark. Now, both have jumped to above 106 and 4.6%, respectively, increasing the pressure on risk assets and emerging market currencies, with the U.S. stock market and Japanese stock market both falling by about 1% to 2%.

Non-U.S. dollar currencies continue to plummet. On the 15th Beijing time, the euro fell for five consecutive days and closed at 1.0624; the U.S. dollar/Japanese yen accelerated upwards, closing above the 154 mark. The bearish sentiment on the yen continued to rise to the highest level since the financial crisis, and the game between the market and the Bank of Japan continues. On the 16th, the U.S. dollar/Japanese yen once reached 154.6045, and was quoted below 154.50 at around 17:20.The Japanese yen seems not to have finished falling. "It is not surprising that the dollar/yen has risen without Japanese officials reiterating their dissatisfaction with the yen level, and approaching 155 is the target level for many. 160 will be the next target, a level at which the currency pair has been stuck since the early 1990s," said David Scutt, a senior analyst at Gain Capital, to reporters.

Renminbi central parity enters 7.1

On April 16, the official central parity rate of the US dollar against the renminbi was reported at 7.1028, down 49 points, falling into the 7.1 range, with the counter-cyclical factor shadow variable reaching -1459 points (strengthening the renminbi compared to the model's predicted value).

Previously, on March 22, after the central parity rate was raised to the 7.1 range, the renminbi experienced a sharp drop, with a single-day decline exceeding 500 points. Since then, the central parity rate has not broken through the 7.1 range, and in the following two weeks, it has continued to fluctuate slightly within the 7.09 range, with several days of central parity deviation reaching as high as 1700, and the spot trading price approaching the 2% fluctuation limit.

Since then, the US dollar index has not weakened, which has increased the pressure on the renminbi exchange rate. "Once it reaches the fluctuation limit, it may affect transactions or the actual needs of enterprises. Since last week, the market has been speculating that the central parity rate will be adjusted. The depreciation on Tuesday of this week also exceeded expectations," a foreign exchange trader from a foreign bank told reporters.

Wang Ju, head of foreign exchange and interest rate strategy for Greater China at BNP Paribas, also told reporters: "Due to the large deviation between the central parity rate and the actual exchange rate, the spot trading price has approached the 2% fluctuation limit set by the central bank, which is around 7.24. Therefore, the central bank needs to use a variety of methods to maintain the stability of the renminbi exchange rate, such as suppressing foreign exchange swaps in the domestic market and moderately tightening the liquidity of the offshore renminbi market."

The economic fundamentals will dominate the market

At present, the central bank's signal to stabilize the exchange rate remains strong. The trend of the renminbi is not only affected by the US dollar but also depends more on the changes in China's economic data.

On April 16, China's first-quarter GDP data was released, with a year-on-year growth rate rising from 5.2% in the fourth quarter of last year to 5.3%, exceeding market expectations (consensus at 4.8%), while nominal GDP grew by 4.2% year-on-year (corresponding to a deflator of about -1.1%, due to negative inflation growth), which is in line with the fourth quarter of last year.

The market's interpretation of the data is quite divided. Although the overall data for the first quarter exceeded expectations, some important monthly activity data in March slowed down significantly. Lu Ting, Chief Economist of Nomura China, told reporters that the growth rate of industrial production in March fell from 7% in January and February to 4.5%, lower than expected (consensus at 6.0%), and the growth rate of retail sales in March also fell from 5.5% in January and February to 3.1%. In contrast, the growth rate of fixed asset investment accelerated from 4.2% in January to 4.7%, higher than expected (consensus at 3.8%). "Fixed asset investment data is reported by local governments and may undergo substantial revisions," Lu Ting said.The GDP data trend for the coming quarters will be closely watched. Due to the "pleasant surprise" of a 5.3% growth in the first quarter, Nomura has raised its full-year GDP growth forecast for China from 4.2% to 4.3%. Goldman Sachs had previously raised its forecast from 4.8% to 5%.