Latest! The US dollar exchange rate rises to 6.9, sellers: wait for "breaking 7"

Recently, exchange rates have been the focus of discussion among cross-border e-commerce sellers. Now, except for the US dollar, other currencies are falling.

Recently, Huawei published an article titled "The entire company's business policy should shift from pursuing scale to pursuing profits and cash flow" on its internal forum, which went viral. Its founder Ren Zhengfei emphasized in the article that "survival should be the most important principle" and "the survival basis should be adjusted to focus on cash flow and real profits, and not just sales revenue as the goal"... A series of views have also been widely resonated in the seller circle.

For cross-border e-commerce sellers, the change of exchange rate is directly related to the amount of profit. If the exchange rate falls, tens of thousands or even hundreds of thousands of profits can evaporate in an instant. Judging from the current exchange rate, sellers on the US site can be happy for a while, but sellers on the European and Japanese sites are in a difficult situation. Unlike the rising exchange rate of the US dollar against the RMB, the euro has been falling. Not long ago, the 1:1 parity between the US dollar and the euro was shocking. Now the euro has broken parity against the US dollar and has fallen to a 20-year low. The exchange rate has been falling, and a group of European sellers have been abused and cried.

In fact, in addition to the US dollar zone, the exchange rates in the euro zone, the yen zone, and the pound zone are all falling. At first, sellers can calmly say that they will keep the money in the account first and withdraw it when the exchange rate is slightly better. However, the exchange rate has been falling all the way, and the money has become less and less valuable. The calmness turns into madness. Sellers on the US site have also encountered such an embarrassing situation. In the case of unstable exchange rates, it is very necessary to formulate a foreign exchange strategy. Especially now that the peak season is just around the corner, how to formulate a foreign exchange strategy to ensure maximum profit should be a common concern of sellers.

The US dollar exchange rate has risen to 6.9. Can it break 7 within the year?

Currently, the US dollar is rebounding strongly.

Today ( August 29), the onshore RMB exchange rate against the US dollar fell by more than 270 points at the opening, and then continued to fall, breaking the 6.90 mark. At the same time, the offshore RMB exchange rate against the US dollar fell straight down, breaking through the three barriers of 6.90, 6.91, and 6.92. As of 9:34, the onshore and offshore RMB exchange rates against the US dollar were 6.9071 and 6.9215 respectively.

The People's Bank of China authorized the China Foreign Exchange Trading Center to announce that the mid-point of the RMB exchange rate in the interbank foreign exchange market on August 29, 2022 was: 1 US dollar to 6.8698 RMB.

In fact, the US dollar exchange rate has been strengthening since it began to rise in April this year. Now most cross-border e-commerce sellers believe that the US dollar to RMB exchange rate is expected to "break 7".

From the source, there are two main factors driving the rise of the US dollar exchange rate: one is the interest rate hike by the Federal Reserve; the other is the interest rate cut by the People's Bank of China. The combination of the two directly affects the exchange rate market.

On August 22, the day when the People's Bank of China announced a rate cut, the offshore RMB exchange rate against the US dollar approached 6.82. On the second day (23rd), the downward trend continued and continued to fall to 6.8656.

Since March, the Fed has raised interest rates by 225 basis points. In addition, the United States, which is struggling with high inflation, is planning a new round of interest rate hikes. James Bullard, president of the Federal Reserve Bank of St. Louis, one of the 12 reserve banks of the Federal Reserve, publicly stated that the Federal Reserve should raise interest rates by 75 basis points starting in September.

Some analysts said that the recent continuous decline in the RMB exchange rate against the US dollar is mainly due to the interest rate cut by the People's Bank of China, and the expected interest rate hike by the Federal Reserve has not yet taken effect.

The following figure combined with the timeline of the US interest rate hike shows that the effect of the interest rate hike will be reflected in the exchange rate very quickly. For example, the US interest rate began to rise in March, and the US dollar exchange rate rose significantly in April. Therefore, it can be predicted that if the interest rate continues to rise in September, the US dollar exchange rate will rise again in the following October, or even sooner.

HSBC previously predicted that the USD/RMB exchange rate would reach 6.9 by the end of 2022 and 6.95 by the middle of 2023. In addition, foreign banks' forecasts for the USD/RMB exchange rate at the end of the year are mostly between 6.7 and 6.95.

However, the USD/RMB exchange rate has now broken through the much-watched 6.8 mark. As expectations of a sharp rate hike by the Federal Reserve heat up, there is a high possibility that the USD exchange rate will reach a higher range or even "break 7" in the remainder of this year.

With this expectation, many sellers want to save the money in their accounts. They all said they would wait until the US dollar exchange rate breaks 7 before transferring the money. One seller with tens of thousands of dollars in hand said that he is optimistic about the future rise of the US dollar exchange rate, and will wait unless he needs the money urgently.

Assuming that a seller holds 1 million US dollars, if he exchanges it at the mid-price of 1 US dollar to 6.8698 RMB on August 29, he can exchange it for 6,869,800 RMB. If he exchanges it at 1 US dollar to 7 RMB in the future, he can exchange it for 7,000,000 RMB, which is more than 130,000 RMB more.

However, some sellers believe that safety is the most important thing. For example, one seller said that he would exchange some of the currency every time the exchange rate rises, so as not to miss out. Another seller also said that you should not think about making the last penny, but just close the deal when you reach your expectations.

Anyway, at present, sellers who only sell in the US can be happy for a while. However, many sellers are operating in multiple markets at the same time. For those sellers whose businesses span both the European and American markets, they are now in a state of both pain and happiness.

Unlike the rising US dollar exchange rate, the euro exchange rate is collapsing. In the European and American markets, if the sellers have a high proportion of US sites, they will not be too sad. At worst, the business volume of the two markets is 1:1, and the exchange rate of the US dollar and the exchange rate of the euro rise and fall, and the pain and happiness can offset each other. The most troublesome are the sellers who have a large share of European sites, or those who only do business in European sites.

The euro exchange rate collapses as it continues to fall

Some are happy, while others are sad. The strong dollar has put tremendous downward pressure on the exchange rates of non-dollar currencies. Now the exchange rates of the euro, pound, yen, won and other currencies are all going down. In particular, the euro has fallen below parity with the dollar, falling to its lowest level in 20 years (since December 3, 2002), ending its one-to-one exchange rate with the dollar.

On August 29, as of 10:29, the euro/dollar exchange rate reached a high of 0.9986 and a low of 0.9916.

The exchange rate of a currency can be used as a judgment of the economic outlook. The current euro exchange rate has been declining, which shows that the expectation that the European economy will get rid of the impact of the new crown epidemic and recover has been replaced by predictions of an economic recession.

The euro's decline is due to multiple factors. Many analysts attribute the euro's decline to market expectations that the Federal Reserve will quickly raise interest rates to fight inflation, which is close to a 40-year high. If the Fed raises interest rates more than the European Central Bank, higher interest returns will attract investors to switch from euros to dollar-denominated investments. These investors will have to sell euros and buy dollars to purchase these shares. This causes the euro to depreciate and the dollar to appreciate.

The ongoing energy crisis is also an important factor. Data shows that energy prices have pushed up the eurozone inflation rate to a record high of 8.9% in July. As Russia has reduced the flow of the Nord Stream 1 pipeline to Germany to 20% of its capacity and said it would shut down the pipeline for three days this week for "routine maintenance", it has cast a shadow over the European economy.

The recent slowdown in European economic growth has also led to a decline in the euro against the US dollar.

Faced with the current decline in the euro exchange rate, foreign trade people have all turned their attention to its future trends.

It is expected that the eurozone will experience a mild recession in the second half of 2022 due to the continued severe disruption of natural gas supply caused by the Russia-Ukraine conflict, which has slowed economic growth momentum. If Russia completely cuts off natural gas supplies, the eurozone may experience a more severe recession.

Last month, the ECB raised interest rates for the first time in 11 years, by more than half a percentage point more than expected. Another increase is expected in September. But if the economy falls into recession, that could halt a series of ECB rate hikes.

"Our outlook, trades and strategist stance certainly favors further euro depreciation from here," said Citigroup's head of CEEMEA strategy.

As we all know, Europe is the second largest market for Chinese cross-border e-commerce sellers. While sellers on the US site are happily calculating how much more RMB they can convert from the US dollars in their accounts, some sellers on the European site, who are under pressure from falling exchange rates and inflation-induced declines in purchase rates, are threatening to sell their accounts and run away.

Faced with the appalling euro exchange rate, some sellers cried and complained that they wished they died every time they looked at it. Some sellers said directly that the euro exchange rate had no lowest and could only go lower and lower, and they really couldn't stand it. Some sellers held the idea that "the euro would not continue to depreciate" and thought about "letting it go for a while" and withdrawing the money when the exchange rate was a little better, but on the other hand they were worried that third-party accounts were not safe.

Some sellers believe that they cannot completely rely on the appreciation of the exchange rate and are trying other ways to deal with the current difficulties. For example, one seller believes that the continued decline in the euro exchange rate is inevitable and expressed his desire to purchase a local EU account to reduce costs and increase profits by paying less taxes.

On August 30 last year (Monday), the euro-RMB exchange rate closed at 7.62, but it dropped to 6.84 at the opening today , a drop of nearly 1 point. Taking 1 million euros as an example, the seller's profit has shrunk by 780,000 yuan compared with last year.

In fact, not only the euro, but also the pound and the yen have fallen into this crisis. Currently, the pound has fallen below 8.10 against the RMB. Today, as of 10:35, it opened at 8.0661 and the lowest was 8.0487. As for the reason for the decline, economists believe that it is also related to the unclear expectations of interest rate hikes, and the risk of the pound falling in the next few weeks still exists.

In addition, the same is true for Japan, another major market for cross-border e-commerce sellers. Not long ago, the yen plummeted nearly 12,000 points against the US dollar, and even experienced four consecutive days of depreciation in a week. Today, as of 10:35, the yen-RMB exchange rate opened at 0.0499 and the lowest was 0.0498.

Faced with a collective downward exchange rate, the most direct way to balance profits is to raise prices. However, with the internal circulation becoming increasingly serious, price reduction is the main theme. Price increases will directly affect the number of orders. Some sellers even have their order volume drop to zero after raising their selling prices. Therefore, exchange rate fluctuations will directly affect sellers' income, and the larger the sellers, the more obvious the losses will be.

The exchange loss is as high as tens of millions, and the sellers' profits are greatly "eaten up"

Anker Innovations mentioned in its 2022 semi-annual report that as of the end of the reporting period, the exchange rates of the euro and the yen have continued to weaken this year. As of the end of the reporting period, the mid-point of the RMB against the euro and the yen had depreciated by 2.93% and 11.37% respectively compared with the beginning of the year, which to a certain extent affected the company's revenue performance in Europe and Japan.

It is reported that in the first half of this year, Anker Innovations' revenue in the European market accounted for 18.84% of its total revenue, which was 1.109 billion yuan, and its revenue in the Japanese market accounted for 13.25% of its total revenue, which was 780 million yuan. Among all regions, Europe and Japan are the second and third largest markets for Anker Innovations. Although the semi-annual report did not mention the specific amount of exchange losses, the losses can be imagined given the market size of hundreds of millions.

For cross-border sellers, exchange rates are an important factor affecting profits. Especially since the outbreak of the epidemic, exchange rates have fluctuated frequently, and once exchange losses occur, profits will be eroded. According to the data of some big sellers, their annual exchange losses range from several million yuan to tens of millions of yuan. Their profits are largely "eaten up" by exchange losses. It should be noted that many sellers work hard all year round, but when they settle their accounts at the end of the year, they may not have pocketed this amount of profit.

The latest prospectus (draft for the board meeting) released by Zhiou Home Furnishing on July 13 shows that due to exchange rate fluctuations, the company's exchange losses recognized in 2019-2021 were RMB 3.2253 million, RMB 4.1423 million and RMB 71.7521 million, respectively, accounting for 2.26%, 0.89% and 24.03% of the total profit, respectively.

It can be seen that the amount of exchange losses of Zhiou in 2021 is relatively large. Zhiou said that this is mainly because the exchange rates of the euro and the US dollar against the RMB have generally shown a fluctuating downward trend. At the end of 2021, the central parity rates of the euro and the US dollar against the RMB fell by 9.86% and 2.52% respectively compared with the beginning of 2021.

With the rapid expansion of the company's overseas business, the company's foreign exchange sales revenue and procurement expenses will further increase. The foreign exchange market has continued to fluctuate recently. For example, due to the recent tensions in the Russian-Ukrainian conflict, there is a certain degree of uncertainty in the trend of the euro against the RMB in the short term.

Compared with the continued appreciation of the RMB and the depreciation of the euro and the US dollar in 2021, although the RMB exchange rate against the US dollar depreciated significantly in 2022, the exchange loss confirmed by Zhiou was still 12.3748 million yuan from January to March 2022.

Another big seller, Savi Technologies, which is also in the process of going public, also suffered a significant foreign exchange loss. On August 27, the prospectus (registration draft) released by Savi Technologies showed that its export business was mainly settled in US dollars, euros, and pounds. The net foreign exchange gains and losses in the company's financial expenses in 2020 and 2021 were 63.3372 million yuan and 27.4069 million yuan, respectively.

The exchange gains and losses incurred by Huadong Damai Chuangyuan Co., Ltd. in 2020 and 2021 were as high as 13.668 million yuan and 9.6959 million yuan, respectively, accounting for 20.87% and 174.61% of the total profits in the current period, respectively.

Fortunately, Chuangyuan's overseas sales are priced and settled mainly in US dollars. Fluctuations in the US dollar-RMB exchange rate will affect its revenue and exchange gains and losses. In the first half of this year, the RMB-USD exchange rate depreciated by about 5%, so the exchange losses have also been greatly improved. It is reported that in the first half of 2022, Chuangyuan's exchange gains and losses were -20.59 million yuan, a year-on-year decrease of 934.05%, and an increase in operating profit of 23.06 million yuan.

However, exchange rates are uncontrollable. Therefore, when mentioning exchange rate risks, major sellers such as Zhiou and Savi all stated that if the RMB continues to appreciate against major settlement currencies such as the US dollar and the euro for a long time or the exchange rate fluctuates significantly, and the company fails to take effective measures to deal with exchange rate risks, it may cause the company to incur large exchange losses, and the company will face the risk of fluctuations in operating performance due to exchange rate changes.

How to deal with exchange rate risk?

The US dollar has now appreciated significantly against all global currencies, with cross-border RMB settlement appreciation exceeding 7.5%, over 12% against the euro and pound, and over 18% against the yen. Chinese cross-border sellers are facing a situation where the US dollar has become more valuable, while other currencies such as the euro, yen, and pound have depreciated against the RMB.

Foreign exchange rates are affected by many factors and are uncontrollable. It is difficult for sellers to predict their trends, but they can take some measures to deal with risks.

Jason Liu, senior product director of Payoneer Greater China, said that sellers can do the following: 1. Use foreign currency to pay for overseas business expenses as much as possible within the scope permitted by national policies, and then convert the balance into foreign currency to confirm income. 2. Shorten the collection cycle to reduce the impact of foreign exchange fluctuations. 3. Different currency fluctuations have different risks, and you need to choose a targeted response plan.

In fact, in order to reduce the impact of exchange rate fluctuations on performance, some big sellers have already used a lot of coping "tricks":

In its prospectus (registration draft) released on August 12 , Taotao Automobile stated that its measures to deal with exchange rate fluctuations mainly include:

① The company's overseas subsidiaries (subsidiaries) have independent pricing power and usually consider the impact of US dollar exchange rate fluctuations when pricing their products. For example, when the US dollar-RMB exchange rate continues to fall, the company will appropriately increase the sales price in the United States based on inventory conditions to reduce the impact of exchange rate fluctuations on operating performance;

② The company mainly adopts spot foreign exchange settlement, chooses to settle foreign exchange when the foreign exchange market is good, and conducts forward foreign exchange settlement and sale business when necessary to reduce the risk of exchange rate fluctuations;

③ The company will increase its US dollar borrowings in 2021 to reduce the risk of exchange rate fluctuations.

At the same time, Huakai Yibai also stated that the company held a board of directors meeting on December 28, 2021 to review and approve the "Proposal on the Holding Subsidiary to Conduct Foreign Exchange Derivative Transactions", agreeing that the holding subsidiary Yibai Network will rely on specific business operations, without affecting the normal daily capital turnover and the normal development of the main business, and use its own funds to conduct foreign exchange derivative transactions within the limit of no more than RMB 150 million in cumulative amount, to prevent large fluctuations in exchange rates from having an adverse impact on the company's performance.

Anker Innovations also said that in order to reduce the impact of exchange rate fluctuations, the company will continue to carry out foreign exchange hedging business to offset the impact of exchange rate fluctuations to a certain extent. In the future, the company will continue to strengthen the analysis and research of exchange rate changes, actively manage foreign exchange risks, adhere to the principle of "risk neutrality", choose appropriate currency quotations, balance foreign currency receipts and payments, and comprehensively adopt foreign exchange hedging and other methods to reduce the adverse effects that may be caused by exchange rate fluctuations.

In addition, it will actively explore the global market and continue to invest in the domestic market, striving to increase the proportion of domestic market share to reduce the uncertainty impact of exchange rate fluctuations on the company's performance.

In general, although the exchange rates of the US dollar to the RMB, as well as the exchange rates of the euro, pound, yen, etc. to the RMB, are showing an ups and downs, since the main target market of most cross-border e-commerce sellers is still in the United States, the current exchange rate situation is relatively good for sellers. For example, Zhiou stated in its latest prospectus that the depreciation trend of the RMB against the US dollar is relatively obvious. From January to March 2022, the company confirmed that the exchange loss decreased by 15.5816 million yuan year-on-year. It is expected that the exchange loss caused by exchange rate fluctuations will have a negative impact on the company's operating performance in the first half of 2022.

US Dollar Exchange Rate