Exchange Rate: Market Driven Two-Way Volatility Is Taking Shape.

The two-way fluctuation of market led Renminbi exchange rate appears to be taking place throughout November. The high trade surplus, the increase in foreign exchange in two months, the continuous sale and sale deficit in March, the Shanghai and Hong Kong pass and many other factors perturbed the RMB exchange rate trend. However, after the launch of the central bank's easing interest rate last Friday, the RMB exchange rate was "totally calm".

This week, the central parity rate set by the Central Bank of China has appreciated for three consecutive trading days, and the spot market has been stable. As of yesterday's close, the US dollar was 6.1392 yuan against the renminbi, and the RMB depreciated by 3 basis points.

With the US Federal Reserve raising interest rate expectations and the strength of the US dollar, the RMB continues to appreciate with the US dollar, and now it has become a very strong emerging market currency. Since the second half of this year, the appreciation rate of RMB against the US dollar has risen to 1.27%. At the same time, the total appreciation rate of RMB against major non US currencies such as the euro, yen and Australian dollar is generally around 10%.

However, the Renminbi should not be so strong. Some foreign institutions believe that, especially the Central Bank of China, to restart interest rate as a traditional monetary policy tool, means that the need for continued appreciation of the renminbi has ceased to exist, so China may start to push forward the gradual devaluation of the renminbi. Next year, China's economy is expected to show low growth, low inflation, low interest rates and weak currencies.

First of all, judging from the general standard of judging the equilibrium exchange rate, a country's trade surplus accounts for 3% of the GDP ratio, so it can be considered that the exchange rate has reached the equilibrium point. Fundamentally speaking, the RMB has reached a balanced exchange rate. According to the BIS, the real effective exchange rate (REER) index has risen for five consecutive months, and the current RMB valuation is already higher than the long term mean of two standard deviations. To some extent, the strong position of the renminbi does not match China's current macro economy.

More importantly, the strong position of the renminbi is very unfavorable for China's exports. At the same time, with the sharp fall in international commodity prices, a strong currency will also exacerbate China's deflation risk.

In fact, from the micro level, the deficit in the three consecutive months of sale and sale shows that the willingness to hold foreign exchange is rising, and the unilateral appreciation of the renminbi has been weakened. From the perspective of capital allocation, the United States is tightening monetary policy, and China is more inclined to be relaxed. The gradual narrowing of spreads between the two countries may lead to monetary policy. Capital outflow This also reduces the pressure on RMB appreciation, which can be corroborated from the capital account deficit in the third quarter of this year.

Nevertheless, all of the above can not be strong. RMB The reasons for the sharp depreciation. The expectations of the market are changed according to the policy actions of the Central Bank of China, and the goal of the Central Bank of China is to approach the equilibrium exchange rate. China now adopts the "managed floating exchange rate system", which will maintain the two-way fluctuation of exchange rate from the angle of policy intervention, and shift from unilateral appreciation to unilateral depreciation, or the government does not want to see it.

"RMB should really do it. Two-way fluctuation We should consciously increase the floating range instead of always focusing on the dollar. Economists with foreign banks told reporters that the long-term factor affecting the exchange rate is the market's expectation of reform. If reform can fundamentally solve some problems in China today, the market will have confidence in the domestic economy and there will not be a significant depreciation of the renminbi. In addition, the future depends on whether the Chinese government encourages capital, especially private capital outflows. If there is no two-way capital flow, the RMB will hardly become a floating exchange rate.