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The RMB exchange rate is showing signs of strengthening.

Late at night on August 2, Beijing time, the RMB exchange rate hit a recent high. During the session, both the onshore and offshore RMB exchange rates against the US dollar rose above the 7.16 mark.

At 23:30 Beijing time on August 2, the offshore RMB exchange rate against the US dollar hit a low of 7.1433, breaking through the 7.15 mark and rising more than 1,000 points on the day; at the same time, the onshore RMB exchange rate against the US dollar was 7.1524, breaking through the 7.16 mark and rising more than 900 points on the day.

It is worth noting that while the RMB exchange rate continued to strengthen, the US dollar index continued to fall. As of 23:30 Beijing time on August 2, the US dollar index fell below 104, reporting 103.23, approaching the integer of 103.

In the view of Zhong Zhengsheng, chief economist of Ping An Securities, the US dollar index has fallen since July, but the RMB exchange rate has not followed suit, accumulating "catch-up" potential and laying the macro foundation for the sharp rise in the RMB exchange rate.

"The combined signal of the policy focus shifting toward 'stable growth' is crucial to boosting market confidence in the Chinese economy and strengthening the foundation for the stability of the RMB. In addition, China's trade surplus reached US$99 billion in June, a record high for a single month. The surplus in goods trade is the main source of surplus in my country's balance of payments. Maintaining a high surplus in foreign trade provides a solid foundation for the RMB exchange rate." Zhong Zhengsheng said in the research report.

RMB regains 7.15 mark

"The highest onshore RMB exchange rate was 7.2776 on July 24. If you exchanged 50,000 US dollars at that time, and it reached the lowest point of 7.1524 on August 2, you would have lost more than 6,000 RMB in just a few days." Linda, who does cross-border business, told the China Times reporter that if you exchanged at the lowest point yesterday (August 2), you would have saved 6,000 RMB directly compared to the highest point.

From Linda's description, we can see that the RMB exchange rate has continued to appreciate over the past month.

Looking back at the whole month of July, the onshore RMB exchange rate against the US dollar appreciated by 470 basis points compared with the closing price of 7.2672 in June, with an overall appreciation of 0.65% in July. The offshore RMB exchange rate against the US dollar appreciated by 1% in July, with a cumulative appreciation of 730 basis points.

In the last week of July, the RMB exchange rate showed two significant appreciation processes. The first occurred on July 25, when the offshore RMB exchange rate against the US dollar rose by more than 700 basis points during the day, and appreciated to 7.2035, setting a new high since May 6.

On the same day, the onshore RMB exchange rate against the US dollar once touched the 7.21 mark, an increase of more than 500 basis points in a single day.

Subsequently, on July 30 and July 31, the onshore and offshore RMB exchange rates against the US dollar continued to rise. On July 31, the onshore RMB exchange rate against the US dollar closed at 7.2202, an appreciation of more than 300 basis points from the closing price of the previous trading day; the offshore RMB exchange rate against the US dollar once approached the 7.21 mark during the session, and finally closed at 7.2266, up 0.24% on the day.

However, the central parity rate of RMB against the US dollar fell slightly in July. On July 31, the central parity rate of RMB against the US dollar was 7.1346, an increase of 18 basis points, a decrease of 78 basis points from 7.1268 at the end of June, and a depreciation of 0.11%.

Despite this, after entering August, the RMB exchange rate against the US dollar rebounded strongly again on August 2.

On August 2, non-US currencies generally rose. Among them, the onshore RMB exchange rate against the US dollar rose through 7.24, 7.23, 7.22, 7.21, 7.20, 7.19, 7.18, 7.17, and 7.16 during the session, while the offshore RMB exchange rate against the US dollar once rose above 7.15.

Calculated based on the opening price of the day, on the evening of August 2, the onshore RMB exchange rate against the US dollar hit a high of 7.1524 during the session, up 902 basis points on the day; the offshore RMB exchange rate against the US dollar rose sharply during the session, climbing to 7.1433 at one point, with a maximum increase of 1089 basis points on the day, breaking through the 7.15 mark.

It is worth noting that while the RMB continued to strengthen, the Japanese yen also broke through several barriers. On August 2, the yen-dollar exchange rate once rose above 147.

"Since 2023, the exchange rates between the RMB and the Japanese yen have maintained a high correlation, mainly because both have the attributes of low-interest currencies in carry trades. Although the width of the US-China interest rate gap is not as wide as the US-Japan interest rate gap, the low volatility of the RMB exchange rate since the beginning of this year makes the RMB's attributes as a carry currency not weaker than the Japanese yen, and thus the trend logics of the two are similar." Zhong Zhengsheng said that the recent strong appreciation of the yen and the adjustment of US technology stocks have further catalyzed the unwinding of yen carry trades, which had an emotional pull on the RMB.

In terms of policy regulation, Zhong Zhengsheng further analyzed that the offshore RMB liquidity has seen a price increase amid the abundance of liquidity, reflecting the policy's intention to increase the cost of shorting the RMB. At the same time, since the fourth quarter of 2023, the decline in swap points has begun to significantly exceed the theoretical value, which also reflects the policy's intention to stabilize the exchange rate to a certain extent. Therefore, under the extremely low interest rate differential between China and the United States, the scale of Chinese bonds held by overseas institutions has rebounded significantly.

What do you think about the exchange rate in the future?

The appreciation of the RMB is related to the recent weakness of the US dollar and the US "July non-farm employment data" released on the night of August 2nd Beijing time.

The US non-farm payrolls data released on the evening of August 2 showed that the number of non-farm payrolls in the United States increased by 114,000 in July, which was expected to increase by 175,000 and the previous value was 206,000. This data difference was weaker than expected.

The latest released U.S. unemployment rate in July was 4.3%, the highest since October 2021, with expectations of 4.10% and the previous value of 4.10%.

"U.S. employment slowed more than expected in July, and the unemployment rate rose to the highest level in nearly three years, suggesting that the labor market is deteriorating faster than previously expected and triggering recession indicators," industry analysts said.

After the data came out, the US dollar index fell by more than 0.8% to a low of 103.3767, the lowest since late March.

At the same time, after the above data was released, the three major U.S. stock indexes opened lower collectively. The Dow Jones Industrial Average once plummeted by more than 900 points, and the Nasdaq once plummeted by more than 3%.

The unexpected weakening of the US dollar has led to a series of appreciations of non-US currencies. How will the RMB exchange rate trend in the future?

China Everbright BankZhou Maohua, a macro researcher at the Financial Markets Department, told the China Times that the current stable operation of foreign trade and steady recovery of domestic demand provide a solid foundation for the realization of the annual economic goals. With the increased resilience of foreign trade, significant economic recovery and the increased attractiveness of RMB assets, the RMB exchange rate is expected to rise steadily in the second half of the year.

Minsheng BankChief Economist Wen Bin also believes that with the implementation of policies such as the July interest rate cut and the accelerated fiscal efforts, domestic demand is expected to be boosted to a certain extent, and the continued recovery of external demand is relatively certain. Combined with the relatively rich exchange rate management tools, the RMB exchange rate is expected to remain basically stable at a reasonable equilibrium level, and the USD/RMB exchange rate will fluctuate in both directions within the range of 7.1-7.3 most of the time. Especially after the Fed's interest rate cut is implemented, the depreciation pressure may be significantly reduced.

As for the longer-term trend of the RMB exchange rate,CICCLi Liuyang, chief foreign exchange analyst of the research department, believes that on the one hand it depends on the recovery of China's economic expectations and the direction of interest rates, and on the other hand it depends more on changes in the overseas economic and financial situation.

"In this round of overseas economic expansion cycle, the RMB is used more as a financing currency. Therefore, if overseas asset returns decline in the future and volatility increases systematically, this will be conducive to the return of cross-border capital and the strengthening of the RMB. Therefore, the conditions for a systematic appreciation of the RMB exchange rate in the future may coincide with the downward cycle of the overseas economy and interest rates," said Li Liuyang.

Editor-in-charge: Meng Junlian Chief Editor: Zhang Zhiwei