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The exchange rate of RMB against the U.S. dollar has entered a period of large fluctuations. According to the foreign exchange trading center, on May 25, the central parity rate of the RMB against the U.S. dollar in the inter-bank foreign exchange market was 7.0529 yuan, an increase of 31 basis points from the previous value. On the same day (as of 3:00 p.m. Beijing time), the offshore renminbi and onshore renminbi against the US dollar once fell through 7.07 in the intraday session, and the intraday fluctuation exceeded 150 basis points, of which the offshore renminbi once fell to 7.09. So far this year, the dollar has appreciated against the yuan by more than 2.3%.

5 Factors Contributing to the Yuan’s Recent Weakness

Recently, the RMB exchange rate against the US dollar has continued to fluctuate and fall. In this regard, Wang Qing, the chief macro analyst of Dongfang Jincheng, said that the main reason is that at the interest rate meeting in May, the Federal Reserve stated that the possibility of cutting interest rates within this year is very small. This statement has led to a recent rebound in the US dollar index. Under the price comparison effect, the RMB will depreciate to a certain extent against the US dollar. Since the beginning of the year, the domestic settlement rate has been generally low and the sales rate has been relatively high. This means that the high trade surplus is more converted into domestic dollar deposits instead of being converted into RMB, which will also affect the balance of supply and demand in the foreign exchange market, causing the RMB to depreciate against the US dollar.

Guolian Securities analyst Wang Yupeng’s research report believes that there are five reasons for the fall of the RMB exchange rate this time. First, the domestic economic fundamentals are not as expected. The economic data in April is lower than expected, which is the key factor leading to the fall of the RMB exchange rate; Domestic policies are not as strong as expected; third, the absolute level of core inflation growth in the United States is still high; fourth, the recent US debt ceiling issue and the turmoil in the US banking industry have led to increased risk aversion in the market and a stronger US dollar index; fifth, from the perspective of market supply and demand , Since the fourth quarter of 2022, the surplus in foreign exchange settlement and sales has narrowed, and deficits have appeared in some periods, reflecting the weak demand for RMB, and the support for RMB from foreign exchange settlement demand is weak.

The main trigger is the reappearance of the “ghost” of the Fed’s interest rate hike. Previously, the market expected that the Fed would stop raising interest rates starting from June this year, but judging from the current situation, this possibility is gradually decreasing. There is even the possibility of another rate hike.

St. Louis Fed President James Bullard said on Monday that he supports two more interest rate hikes; the Minneapolis Fed President said that a pause in rate hikes in June would not signal the end of the tightening process.

Markets are currently trading with investors pricing in a 46% chance of a 25 basis point hike in July and a 28% chance in June. Just a week ago, markets were pricing in zero chance of a rate hike in July.

The U.S. dollar index hit a fresh seven-week high of 104.072 earlier, spurred by news that a rate hike is more likely.

Historically, there are generally three attitudes and responses of the central bank when the RMB exchange rate falls. One is to moderately adjust the supply and demand of the foreign exchange market and stabilize market expectations by lowering the reserve requirement ratio for foreign exchange deposits. Since 2020, the central bank has adjusted the reserve requirement ratio for foreign exchange deposits four times. The second is to adjust monetary policy. Intervene through more market monetary tools to increase foreign capital’s demand for RMB, thereby stabilizing the RMB exchange rate, instead of extensively adjusting interest rates and reserve ratios as the main means of response. Third, the central bank may allow exchange rate fluctuations. If the exchange rate of RMB against the U.S. dollar under the influence of market preferences falls, it will not lead to large-scale capital outflows, and it will also help the short-term recovery of exports. Therefore, the central bank may wait and see and will not easily adjust monetary policy due to the exchange rate.

Sustained decline unlikely

From a comprehensive market point of view, although the onshore and offshore renminbi broke through “7” again this time, it did not change the support for the medium and long-term renminbi value.

On April 4, Yi Gang, governor of the central bank, mentioned in his speech at the 2023 China Financial Academic Annual Conference and China Financial Forum Annual Conference that we insist on letting the market play a decisive role in the formation of the exchange rate. Generally speaking, the RMB exchange rate is determined by the market. of.

Yi Gang also said that in the past five years, the renminbi has “broke 7” against the US dollar three times. The first time was in August 2019, the second time was in February 2020, and the third time was in September last year. The month returned to below 7, and it took 3 months last year. Yi Gang emphasized, “This is the result of market supply and demand, which shows that my country’s foreign exchange market is resilient and capable of achieving dynamic equilibrium.”

Zhao Qingming, deputy director of the China Foreign Exchange Investment Research Institute, said that overall, although the “7” is temporarily broken, there will be no sharp depreciation, nor will it fall back to last year’s low of 7.30. This possibility is basically impossible. existing.

Wang Qing believes that looking forward to the future, as the Fed’s current round of interest rate hikes enters the final stage, coupled with the impact of the banking crisis, the downward pressure on the U.S. economy will further increase, and it is unlikely that the U.S. dollar index will continue to rise in the later period. In addition, the current domestic US dollar deposit interest rate has entered the top range, and the probability of further rise is very small; and with the continuous recovery of the domestic economy, the recovery of various market interest rates, including the RMB deposit interest rate, is a general trend. From this point of view, the current situation of low settlement rate and high sales rate is difficult to sustain, and the trend of RMB exchange rate in the later period will return to the dominance of fundamentals. With the overseas economy down this year and the domestic economy continuing to recover, there is no room for the RMB to depreciate. From this point of view, the exchange rate of RMB against the U.S. dollar “breaking 7” this time is more the result of normal fluctuations in the foreign exchange market. Next, the regulatory authorities may guide market expectations appropriately and prevent the “herd effect” in the foreign exchange market by strengthening market communication and other means. Excessive concentration, but there is little need to intervene through policy means in the short term.

Zheng Jiawei, an analyst at Shanghai Securities, judged that the further downside of the RMB exchange rate is limited. Affected by uncertain factors such as the U.S. debt ceiling negotiations recently, U.S. bond yields have rebounded significantly, and the 10-year U.S. bond yield has risen again to 3.7%, driving the U.S. dollar index to strengthen and non-U.S. currencies to weaken. Among them, the U.S. dollar/yen weekly Up 1.63%; USD/CNY rose 1.26% for the week. The increase in exchange rate fluctuations this time is due to the strengthening of the US dollar index and the passive depreciation of the RMB exchange rate; With the steady recovery of the domestic economy and the agreement on the overseas debt ceiling, the RMB exchange rate remains volatile in the short term and is expected to regain appreciation in the long term, with limited room for further downside. The interest spreads of urban investment bonds, which have improved greatly in fundamentals and rapidly recovered in regional financial resources, are expected to be further compressed.

(Editor: Fang Haiping)

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