First, the dollar index weakened.
Generally speaking, the strength of the US dollar index is inversely proportional to non-US dollar currencies such as RMB. I am weak if you are strong, and I am strong if you are weak.
The data shows that since the end of May this year, the US dollar index has started to decline, and recently fell below 92, setting a new low since the beginning of May 20 18.
Due to the large amount of money put in by the Federal Reserve, under the expectation of the depreciation of the US dollar, the US dollar index continued to fall, and non-US currencies, including RMB, showed an appreciation trend.
Since the outbreak of the epidemic, the Federal Reserve has launched an unprecedented large-scale monetary easing policy. At the same time, the Federal Reserve adjusted its monetary policy framework and adopted the "average inflation system". In July, the yield of U.S. bonds, which has been depressed, fell further, while the U.S. dollar index basically fell sharply in the second stage after the end of the "dollar shortage" in late July.
Second, China's economic fundamentals continued to improve.
China has achieved remarkable results in epidemic prevention and control, China's economy has continued to recover and improve, and its main economic indicators have gradually improved. In the second quarter, China was the only major economy that achieved positive growth, which was a strong support for the RMB.
Statistics from the National Bureau of Statistics show that China's economy continued to recover steadily in July, in which the growth rate of retail sales turned from negative to positive for the first time in a year, and the export growth rate reached double digits.
The newly released purchasing managers' index of manufacturing industry, non-manufacturing business activity index and comprehensive PMI output index in August all remained above the critical point for six consecutive months.
The strength of RMB exchange rate is also a reflection of China's economic fundamentals. From the performance of manufacturing PMI index, China's economic prosperity continued to recover after the cliff-like decline in February. Both the World Bank and the International Monetary Fund predicted that China would be one of the few countries that can achieve positive economic growth this year. Therefore, the performance of domestic fundamentals after the epidemic provided important support for the RMB exchange rate.
Third, RMB assets are popular.
China is continuing to open its financial market. International investors are optimistic about China's economic prospects and RMB assets. The continuous inflow of foreign capital into China's capital market is conducive to the appreciation of RMB.
According to the data recently released by the State Administration of Foreign Exchange, in July, the scale of overseas net holdings of domestic listed stocks and bonds increased by 1.4 times year-on-year, and the balance of foreign exchange reserves increased positively for four consecutive months.
In the context of loose central banks around the world, during the epidemic, the Bank of China kept its monetary policy prudent and steady, the interest rate difference between China and the United States remained high, and the attractiveness of RMB assets increased significantly, which also promoted the RMB exchange rate to strengthen.
As of August 28th, the typical Sino-US 10-year treasury bond spread has exceeded 230 basis points. The spread between China and the United States has widened, and the return on RMB assets has been higher, attracting foreign capital to continue to flow in, which has boosted the appreciation of RMB exchange rate.
Extended data:
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The strength of RMB exchange rate may continue, but considering the possible risks in the future, including global risk aversion, Sino-US relations, asymmetric capital control, etc., RMB exchange rate may show a gentle appreciation trend, and the short-term RMB exchange rate range may be 6.7~6.8. At the same time, it should be noted that the continuous appreciation of the exchange rate may have a certain impact on China's exports and manufacturing industry.
The China Monetary Policy Implementation Report for the Second Quarter of 2020 issued by the Central Bank in August proposed to deepen the reform of exchange rate marketization, improve the managed floating exchange rate system based on market supply and demand and with reference to a basket of currencies, maintain the flexibility of RMB exchange rate, and play the role of exchange rate as an automatic stabilizer for macroeconomic adjustment and balance of payments. Stabilize market expectations and keep the RMB exchange rate basically stable at a reasonable and balanced level.