J.P. Morgan: Sell the US dollar on rallies; hedging and settlement demand resonate; RMB bullish in the medium term
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The RMB exchange rate continues to show a strong trend. Although there has been some correction in the past two trading days, the extent has been limited, and it remains at a high level overall. On April 20, the onshore RMB/USD rate was 6.8198; on April 14, it once touched 6.8156, reaching a new high since March 2023.
J.P. Morgan believes that corporate demand for foreign exchange settlement forms an important support for the medium-term strengthening of the RMB. Chinese companies’ selling of US dollars has been more persistent, and the momentum has remained strong even after seasonal factors such as the Spring Festival have faded. In March, both the total forex settlement ratio and net forex settlement ratio reached their highest levels for the same period since 2020. More importantly, exporters are not only settling the current incremental US dollar income, but are also actively using up their stockpiled US dollar savings accumulated over recent years.
Meanwhile, the safe-haven attribute of the RMB is also increasing. During the Middle East conflict, the USD/offshore RMB rate remained below the 7.0 level, and the relative stability of the RMB, combined with the narrative of “petrodollar system divergence” and an increased proportion of RMB-denominated settlements in energy trade, has together strengthened its safe-haven appeal.
Based on the reinforced medium-term bullish logic, J.P. Morgan has upgraded its expectation for the RMB, correspondingly lowering its forecast of the USD/RMB exchange rate and expecting it to test the 6.70 level in the coming quarters. It is worth noting that the counter-cyclical factor has recently become active again, indicating the central bank’s willingness to regulate has returned. However, J.P. Morgan believes the central bank’s more likely policy orientation is to guide the RMB to appreciate in an orderly manner by managing the pace, rather than interrupting the appreciation trend.
Companies continue to sell dollars, settlement potential supports medium-term RMB strengthening
The structural forces supporting the medium-term strengthening of the RMB are accumulating, and the continued selling of US dollars by Chinese companies is one of the core drivers.
Data from the State Administration of Foreign Exchange shows that in March, corporate settlement momentum was strong, beyond what can be explained by seasonal factors such as the Spring Festival. In that month, the total forex settlement/sale ratio reached 71.0%, and the net settlement ratio was 7.7 percentage points, both the highest levels for the same period since 2020, indicating that in the context of deepening geopolitical and exchange rate volatility, companies prefer to convert US dollar income to RMB, and their willingness to settle remains strong.
More notably, the net US dollar selling by companies in March has already exceeded the theoretical upper limit for settling incremental US dollar income. Net US dollar selling related to goods trade reached $60 billion in March, the same as in February, while the trade surplus narrowed during the same period. According to the State Administration of Foreign Exchange, exporters’ incremental trade-related US dollar income was about $50 billion that month, of which about 30% might be settled in RMB, leaving roughly $35 billion theoretically to be settled. The actual settlement volume far exceeded this estimate, meaning that exporters are not only settling incremental US dollar income, but also actively using up stockpiled US dollar savings accumulated over the past years.
J.P. Morgan estimates that between 2022 and 2025, Chinese companies could have accumulated $600 billion to $900 billion in overseas US dollar deposits. This huge stock of funds forms a sustained settlement potential, which is enough to provide strong support for RMB appreciation over a long period.
Safe-haven attribute rising, RMB settlement share in commodities surges rapidly
In addition to corporate FX settlement, the rising status of the RMB as a global transaction currency is providing a path for its medium-term strengthening.
During the Middle East conflict, the USD/offshore RMB rate stayed firmly below the 7.0 threshold, and the relative stability of the RMB significantly strengthened its “safe-haven currency” narrative. At the same time, discussions around the “petrodollar system divergence” and the rising share of RMB-denominated settlements in energy trade continue to heat up.
The data confirms this trend. The share of RMB settlements in total RMB-denominated goods trade related to commodities has risen from about 5% in 2020 to about 20% in 2023. On a longer term, the proportion of RMB in cross-border settlements for goods trade has now approached 30%, compared to 12% in 2018—a significant increase.
Central bank may focus on managing the pace
Based on the above-mentioned medium-term bullish logic, J.P. Morgan further upgraded its expectations for the RMB and correspondingly lowered its USD/RMB exchange rate forecast.
Specifically, the bank adjusted its USD/RMB target prices for Q2 to Q4 of 2026 and Q1 of 2027 from the previous 6.85 for each quarter to 6.80, 6.75, 6.70 and 6.70, respectively. The report points out that the 6.70 target reflects more the judgment on the direction and extent of RMB appreciation, rather than a precise prediction of the specific path. The actual appreciation process may be more tortuous than the predicted curve.
From the behavior of the central bank, the People’s Bank of China recently once again showed signs of counter-cyclical regulation, with the counter-cyclical factor being reactivated. But J.P. Morgan believes the central bank will not “set a hard bottom line”, but is more likely to guide the RMB to appreciate in an orderly manner through managing the pace, rather than blocking the appreciation trend.
On the trading side, as there is still a large deviation between the spot rate and the central parity rate, J.P. Morgan currently maintains a neutral position on USD/RMB. However, the bank prefers to use opportunities from exchange rate rebounds to re-establish short USD positions, rather than chasing the USD at the current level.
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