The U.S. dollar index continues to strengthen, driving the RMB exchange rate against the U.S. dollar to continue to fall.
On September 6, the spot exchange rate of RMB against the U.S. dollar fell below the 7.31 mark at the opening, and then further fell below 7.32. It reached an intraday low of 7.3248 that day, setting a new intraday low since early November last year. Subsequently, the spot exchange rate of RMB against the U.S. dollar recovered. 7.32 mark.
The offshore RMB exchange rate against the US dollar, which more reflects the expectations of international investors, also fell below the 7.32 mark, reaching an intraday low of 7.3277, a drop of more than 200 points from the previous trading day.
After rising 0.67% in the previous trading day, the U.S. dollar index, which reflects the trend of the U.S. dollar against a basket of currencies, continued to rise on September 6, once reaching 104.88 during the session.
Many factors affect exchange rate fluctuations
Since the beginning of this year, the foreign exchange market has generally operated stably, and the RMB exchange rate has remained basically stable at a reasonable and balanced level. In August, the RMB exchange rate against the US dollar showed a depreciation trend, with the onshore and offshore RMB exchange rates against the US dollar both falling below 7.3 yuan. Data show that on August 17, the onshore RMB exchange rate against the U.S. dollar was as low as 7.3180, and the offshore RMB exchange rate against the U.S. dollar was as low as 7.3494, a new low since December 2022.
As the U.S. dollar index has strengthened in recent days, the increase in the RMB exchange rate against the U.S. dollar brought about by the central bank’s announcement to lower the foreign exchange deposit reserve ratio for financial institutions has been wiped out.
On September 1, the central bank announced that it would lower the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points starting from September 15, 2023, that is, the foreign exchange deposit reserve ratio will be reduced from the current 6% to 4%. After the news was announced, the offshore RMB rose significantly against the US dollar, once rising by more than 290 points.
Regarding the recent weakening of the RMB exchange rate against the U.S. dollar, experts said that it is mainly caused by short-term pressure, including changes in interest rates caused by the divergence of Sino-U.S. monetary policies, the periodic strengthening of the U.S. dollar exchange rate and other factors that have put short-term periodic pressure on the RMB exchange rate. . In the medium to long term, the RMB exchange rate continues to remain basically stable at a reasonable and balanced level, with solid fundamental support.
“The U.S. dollar index has continued to strengthen since mid-April. Although it has fallen somewhat since June, it is still at a high level, which has exerted passive depreciation pressure on the RMB exchange rate. Recently, the RMB exchange rate has been significantly under pressure as the U.S. dollar index fluctuated at high levels. Subsequently, the RMB has stabilized and even The key influencing factor for the shift to appreciation still lies in the extent and sustainability of the recovery of domestic economic fundamentals, especially the recovery of domestic demand.” Ming Ming, chief economist of CITIC Securities, analyzed.
Wen Bin, chief economist of China Minsheng Bank, believes that there are three reasons for the current round of RMB exchange rate depreciation: first, the slowdown in domestic economic recovery, which is the main reason for this round of RMB depreciation; second, the continued tightening cycle of the Federal Reserve has also put the RMB under passive pressure; Third, the regulatory authorities have maintained a high tolerance for exchange rate depreciation, and thus have been able to increase the space for monetary policy control.
Peking University National Economic Research Center analyzed that the inverted interest rate differential between China and the United States and the divergence of monetary policies were the main factors affecting the trend of the RMB exchange rate in August. The fundamentals of the domestic economy are weak, the U.S. dollar index has rebounded strongly, and the central bank has cut interest rates beyond expectations, pushing down the RMB exchange rate.
The “China Monetary Policy Implementation Report for the Second Quarter of 2023” recently released by the People’s Bank of China shows that in the first four months of this year, the RMB exchange rate against the US dollar remained generally stable, with a cumulative appreciation of the central parity rate of 0.6%. Entering May, internal and external factors intertwined to increase pressure on the depreciation of the RMB exchange rate. First, the Fed’s interest rate hike expectations have been repeated repeatedly. The Fed’s interest rate hike expectations, which had weakened at the beginning of the year, have resurfaced, providing support for the rise of the US dollar. Second, the U.S. debt ceiling and geopolitical risks have boosted market risk aversion and boosted the dollar’s rise. Third, domestic seasonal demand for foreign exchange purchases has widened the gap between foreign exchange supply and demand. June to August is the dividend season for Hong Kong stocks, and most of the dividend funds of listed companies need to be purchased in foreign exchange. After the epidemic, the demand for cross-border tourism and foreign exchange purchases for overseas study has also increased significantly.
The RMB exchange rate may continue to be in the bottoming stage
Since September 4, the offshore RMB has depreciated again. Looking forward to the market outlook, the National Economic Research Center of Peking University believes that with the frequent introduction of favorable policies, the domestic economy may stabilize and rebound, market expectations will gradually stabilize, and the central bank will timely activate exchange rate stabilization tools, which will form a supporting role for the RMB in the future. Therefore, the RMB exchange rate is expected to fluctuate in both directions between 7.20 and 7.35 in September.
In addition, the central bank announced on August 15 that it would carry out 204 billion yuan of open market reverse repurchase operations and 401 billion yuan of medium-term lending facility (MLF) operations, fully meeting the needs of financial institutions. The announcement shows that the reverse repurchase and MLF winning bid rates are 1.80% and 2.50% respectively. The previous values were 1.90% and 2.65% respectively, which were reduced by 10 and 15 basis points respectively.
Dongguan Securities analyzed that the unexpected interest rate cut on August 15 showed that the current central bank’s monetary policy is more focused on me. It is expected that the loosening orientation of subsequent monetary policies will continue, the interest rate differential between China and the United States will remain high, and short-term exchange rate flexibility will be relatively liberalized.
CICC pointed out that the RMB exchange rate may continue to face a relatively complex and severe internal and external environment in September. The probability of the U.S. dollar index and U.S. bond yields falling significantly in September is low, and internal factors will continue to be weak in September. However, the possibility of further deterioration is also low. Therefore, it is believed that the RMB exchange rate may continue to be in the bottoming stage under the maintenance of exchange rate stabilization policies. After positive changes in internal and external fundamental conditions, a rebound may begin.
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