After nearly 7 months, the central parity rate of the Chinese yuan against the US dollar has returned to the "6.7 era". On June 5th, the central parity rate of the Chinese yuan against the US dollar rose by 135 basis points to 6.7935, marking four consecutive trading days of increase and setting a new high since November 10th last year. Analysts pointed out that the adjustment of the formation mechanism of the central parity rate of the Chinese yuan against the US dollar, the tightening of offshore Chinese yuan liquidity, and the "demand for supplementary appreciation" of the Chinese yuan against the US dollar are recent triggering factors for the Chinese yuan against the US dollar. From a deeper logical perspective, the sustained weakness of the US dollar index, the widening interest rate differential between China and the United States, and the improvement of China's international balance of payments structure are the core factors driving the strengthening of the RMB exchange rate.

The Renminbi exchange rate remains strong

While the central parity rate of the Chinese yuan against the US dollar continues to rise, both onshore and offshore Chinese yuan exchange rates against the US dollar remain strong. On June 5th, the spot exchange rate of the Chinese yuan against the US dollar fluctuated strongly, breaking through the 6.80 mark of 6.7971 during trading and closing at 6.8014, up 148 basis points from the previous trading day. The offshore RMB exchange rate against the US dollar rose rapidly last week, breaking several barriers in a row. Although it has fallen slightly since June, it still remains stable at the 6.78 level.

As a result, the central parity rate of the Chinese yuan against the US dollar, as well as the onshore and offshore exchange rates of the Chinese yuan against the US dollar, seem to be only one step away from fully returning to the "6.7 era". The main tone of its return is "accelerating the rise", which is unexpected for many market participants.

Previously, due to the market's expectation of the Federal Reserve raising interest rates in June and the judgment that the risk of a US dollar decline has been fully released, many market views believed that the renminbi may fluctuate downward after several months of sideways trading. However, in terms of actual performance, since May 25th, the offshore RMB exchange rate has been the first to trigger this wave, exceeding market expectations.

Co promotion of internal and external factors

Industry insiders believe that the adjustment of the formation mechanism of the central parity rate of the RMB against the US dollar, the tightening of offshore RMB liquidity, and the demand for RMB to rise against the US dollar, among other factors, have triggered this wave of RMB exchange rate. Furthermore, the sustained weakness and resistance of the US dollar, the widening interest rate differential between China and the United States, and the improvement of China's international balance of payments structure are the core factors driving the strengthening of the RMB exchange rate.

From the perspective of 'replenishment demand', since the US dollar index hit a peak of 101.16 on April 7, 2017, as of May 31, the depreciation of the US dollar index was about 4.1%. However, during the period from April 10 to May 24, the exchange rate of RMB against the US dollar was almost non-existent. Furthermore, the cumulative decline of the US dollar index since the beginning of this year has exceeded 5%, while the central parity rate of the RMB against the US dollar and the onshore RMB against the US dollar are both less than 2%, and the offshore RMB against the US dollar is also less than 3%.

From a deeper logical perspective, both domestic and international factors have undergone relatively positive changes since the beginning of this year, which is the core reason for the recent RMB exchange rate. Shenwan Hongyuan Securities pointed out that the performance of the Trump administration was lower than expected, and the outlook for the US economy and inflation weakened, posing a certain downward risk to the Fed's interest rate hike path. The US Treasury and US dollar indices fell from high levels, and external pressure on the RMB weakened. At the same time, China's international balance of payments structure continues to improve, and the pressure on exchange rates at the transaction level has significantly weakened; The widening interest rate differential between China and the United States has driven the sentiment of the exchange rate market.

Normalization of bidirectional fluctuations

Analysts believe that considering factors such as improved market expectations for the Chinese yuan, changes in the trend of the US dollar, and the potential for further appreciation of the yuan, there may still be some room for the yuan's temporary growth. But after experiencing this rapid wave, the short-term RMB exchange rate may enter a wide range of fluctuations. In the medium to long term, the trend of the RMB exchange rate will continue to return to economic fundamentals, with a focus on stable operation, while two-way fluctuations will also become normalized.

Currently, multiple institutions have confidence in the short-term stabilization of the RMB exchange rate. The macro research team of Guotai Junan Securities stated that there is some room for the RMB to be phased in. One reason is that the short-term economic performance of the United States is not as good as that of Europe, and the political uncertainty in the United States has increased, easing the pressure of the Chinese yuan on the US dollar. There is room for the short-term appreciation of the Chinese yuan; Second, the interest rate gap between China and the United States is large. At present, the interest rate gap between American debt in the 10-year period is about 140 basis points, and China's monetary and financial policies are currently in the tightening stage; Third, enterprises are more willing to settle and sell foreign exchange, and Bond Connect may promote some capital inflows.

In the medium to long term, the trend of the RMB exchange rate ultimately depends on fundamentals. Multiple institutions believe that, on the one hand, although there have been some signs of weakness in US economic indicators recently, the Federal Reserve's expectations for policy prospects remain stable and interest rate hikes are still expected; On the other hand, despite the slowdown in credit growth, there is still significant downward pressure on the domestic economy in the future, and the pressure of capital outflows cannot be ignored. Therefore, we cannot be overly optimistic about the time and space of the Chinese yuan.