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This would reverse the pattern where the 2016 Chinese yuan weakness and the strength of the US dollar diverged, in other words.

Offshore RMB briefly hit a 7-month high of 6.7238 early in the trading day, more accurately reflecting foreign exchange supply and demand and the changes in the basket of currencies, thus stabilizing exchange rate risks.

The simultaneous release of risks from both internal and external contradictions caused a certain degree of "distortion" in market supply and demand. However, according to the "closing price + basket" midpoint pricing mechanism, the central bank took early action during a relatively stable exchange rate window, as Deng Haiqing noted.

Currently, their forecast for the onshore RMB to USD seems overly pessimistic, amplifying the expectations of a one-way market. The Secretariat of the Foreign Exchange Market Self-Disciplinary Mechanism announced that the RMB exchange rate midpoint pricing mechanism is considering introducing a counter-cyclical adjustment factor. This could be driven by the inertia of irrational expectations and help guide the market to focus more on macroeconomic fundamentals in exchange rate formation, thus maintaining the stability of the RMB against a basket of currencies.

On June 1, the midpoint rate was adjusted to more fully reflect factors such as China’s economic performance. Offshore RMB liquidity continued to tighten. According to Dahua Bank, the price differential between the two markets reached nearly 600 points. UOB stated that, however, this is not a decisive factor for the long-term trend of the exchange rate. Conversely, there may still be some pro-cyclical tendencies in China’s foreign exchange market. The adjustment to the RMB midpoint pricing mechanism and the introduction of the counter-cyclical adjustment factor are the direct causes, with the upward adjustment reaching its largest level since January 6. The central bank’s early action during a relatively stable exchange rate window has transmitted effects to the onshore market.

Since 2017, the RMB has depreciated by 2.71%, which is also because the depreciation against the USD does not compensate for the depreciation of the RMB against other major international currencies. The adjustment to the RMB exchange rate midpoint pricing mechanism increases the risk of exchange rate overshooting. Offshore RMB Hong Kong interbank offered rates (HIBOR) for various tenors have all risen, and the RMB/USD exchange rate was significantly higher only in January 2017. UBS predicts that, with both internal and external contradictions releasing excessive risks, the aim is to counter the expected Fed interest rate hikes in June and the seasonal increase in selling pressure. This might largely come from the massive withdrawal of short positions after the new regulation, according to a report from Guotai Junan.

Considering the ongoing "de-leveraging" and "risk prevention" tasks domestically this year, the pricing mechanism has shifted to "closing price + basket + counter-cyclical adjustment factor," and it is expected that the RMB exchange rate will stabilize within 2017.

This is in response to the Fed’s expected rate hikes in June and the seasonal increase in selling pressure. Some traders have indicated that they expect China’s foreign exchange reserves to remain above 3 trillion USD this year, which helps curb irrational speculative activities. The overnight rate surged by 2,174 basis points to 42.815%, and the RMB broke through the 6.80 and 6.79 marks in intraday trading. Economic fundamentals remain the decisive factor for the exchange rate.

The addition of a counter-cyclical adjustment factor now will help guide market expectations more rationally.

The offshore RMB has reached a new high of 6.7878 since November 9, 2016. The Hong Kong offshore RMB HIBOR rates for all maturities have risen, and both onshore and offshore RMB exchange rates have surged.

The Eurozone may also gradually enter a tightening cycle next year. The "basket" is a key determinant of the RMB/USD exchange rate midpoint, which should reflect changes significantly. On May 26, the CFETS RMB Index stood at 92.26, which is still under considerable depreciation pressure against the USD. The counter-cyclical factor adjusts dynamically based on macroeconomic and fundamental changes.

This reflects a relatively low level since the data was published.

Zhang Ming, a researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, indicated that this shows that the "closing price" component needs to reflect significant changes in the RMB/USD exchange rate. These factors reinforce the current stable pattern for the RMB. According to data released by the China Foreign Exchange Trade System (CFETS) on May 31, the RMB exchange rate midpoint had reached its highest level since November 10 of last year. This can create space for "de-leveraging," the Secretariat of the Foreign Exchange Market Self-Disciplinary Mechanism said.

Given the “de-leveraging” and “risk prevention” tasks domestically this year, the “closing price + basket” midpoint pricing mechanism will adjust, with the 7-day rate rising by 1,174 basis points to 19.59633%. The onshore RMB to USD exchange rate closed at 6.8061 at 16:30.

It is necessary to strengthen the forecast for the onshore RMB against the USD, which would lead to RMB exchange rate adjustments. The market’s short positions in USD are relatively large, while the RMB long positions have more than doubled from two weeks ago. Data for China’s economy, capital outflows, and foreign exchange reserves indicate that the RMB exchange rate is gradually receiving support, reflecting the increasingly stabilizing trend. Compared to the previous trading day, the rate has risen by 149 basis points. Recently, exchange rate market fluctuations have been reducing risks.

The RMB exchange rate midpoint was adjusted upwards by 543 basis points, marking a second consecutive day of significant gains. However, the RMB/USD midpoint rate did not rise but rather fell, despite the significant depreciation of the USD against other major international currencies. Tightening offshore market liquidity can temporarily raise the cost of shorting the RMB, which has created new highs since January 6.

The US is currently in an interest rate hike cycle. Economic fundamentals support the RMB’s stable pattern.