Will the RMB exchange rate usher in a new cycle?

International Business News  –  On August 19, the RMB mid-price against the USD was 263 basis points lower than the previous trading day, at 6.8065.

There are two main measures of the price of money, internally the interest rate and externally the exchange rate. Regarding the current exchange rate changes, will the RMB usher in a new cycle?

Wen Bin, chief researcher of China Minsheng Bank, earlier argued that this year, the external environment is complex and volatile, China has continued to increase efforts to stabilize foreign trade and foreign investment, foreign trade and the introduction of foreign investment are generally stable, especially the current account and foreign direct investment and other balance of payments underlying surplus growth than the same period last year, which is conducive to the overall stability of cross-border capital flows and smooth operation of the foreign exchange market.

Now, this sign is more obvious. Wang Jianhui, a senior industrial economic researcher, said that the current trend of RMB has continued the relative weakness of the previous period, but from the performance of the three price quotes in the onshore market, offshore market and mid-price, not only has the rate of weakness slowed down, but there is a certain phase of bottoming out and stabilization, and there is some support for the mid-price of RMB exchange rate to maintain between 6.75 and 6.85.

As of press time, the RMB mid-rate against the USD was 263 basis points lower than the previous trading day, at 6.8065.

While the onshore RMB to USD exchange rate opened at 6.7855 on August 19 and has broken through the 6.8 barrier as of press time. Meanwhile, the offshore RMB to USD exchange rate opened at 6.8025 on Aug. 19 and has risen to 6.8205 as of press time.

Wang Jianhui said that the offshore market exchange rate is more susceptible to market fluctuations, in times of weakness, the leading down trend is more obvious, in times of strength, the leading up trend is more obvious, so it will rise more in times of strength and fall more in times of weakness. The onshore exchange rate is relatively more reflective of actual demand in the domestic market and better reflects fundamentals, so the overall weakness is slower and less dramatic. The mid-rate is formed based on the previous trading day’s transactions in the domestic market, reflecting more domestic market demand, and is formed according to a quantitatively weighted average, so it is more of a reference indicator that does not most accurately reflect the latest price level, but can reflect short-term trends.

For the current emergence of short-term changes, Wang Jianhui believes that there are three main reasons for the RMB to USD exchange rate forced into 6.8: First, the gradual slowdown in economic growth, the market cautious judgment of the overall Chinese economy; Second, the level of domestic debt has risen, forming pressure on the local currency; Third, the change in monetary policy, now the major Western economies towards the recovery of liquidity, or even tightening direction, China’s central bank maintained an overall active monetary policy, even including the MLF monetary tool adjustment, showing some easing signals. Therefore, the easing of monetary policy, relative to the tightening of monetary policy of the currency, will also show some weakening pressure.

On August 15, the central bank announced a new round of MLF and reverse repo operations: the medium-term lending facility (MLF) operation and the open market reverse repo operation both fell 10 basis points in the winning rate. “MLF interest rates fell beyond expectations to open up market expectations of downward interest rates, the RMB exchange rate on Monday and Tuesday under pressure or obvious, but there was no continuous decline, the spot exchange rate rebounded, coupled with the latest release of the Fed’s July meeting minutes attitude compared to the statement after the rate meeting more dovish, for the time being has not seen a stronger depreciation is expected. ” Shanghai a joint-stock bank foreign exchange trader said.

Analysts believe that previously, China and the United States monetary policy one to the left, one to the right, the yuan exchange rate fluctuations. Now both countries have fine-tuned their policies, signaling that there is little room for the yuan to fall in the next few months.

It is worth noting that the central bank also mentioned in the second quarter “China Monetary Policy Implementation Report” to maintain the basic stability of the RMB exchange rate at a reasonably balanced level.

“The trend of the RMB exchange rate will be affected by multiple factors such as foreign exchange supply and demand and international financial markets, and may rise and fall in the short term, but will remain flexible and float in both directions, and continue to remain basically stable at a reasonable equilibrium level overall.” Wang Chunying, deputy director of the State Administration of Foreign Exchange, said.

In this regard, Wang Jianhui judged that technically speaking, the RMB to USD exchange rate will remain at the level of 6.75-6.85 in the future. There may be a phase of finishing period, the specific length of time depends on the performance of economic data, such as short-term look at the PMI and CPI, medium-term to see whether the central bank monetary policy has some signs of return to neutrality, if not to wait for the introduction of the third quarter economic data, to see whether the economy has a significant rebound.