On September 30, 2016, CFETS RMB exchange rate index closed at 94.07, losing 0.28% from the end of August; RMB exchange rate indices based on BIS currency basket and SDR currency basket closed at 94.75 and 95.05 respectively, losing 0.31% and 0.06% from the end of August. In general, three RMB exchange rate indices have all maintained steady trend since August. They fluctuated in both directions during September, but their volatility was relatively small. In September, the annualized volatility of the CFETS RMB exchange rate index was 2.62%, not only lower than that of August but also lower than that of the USD/RMB central parity, which was 3.26%.
The USD/RMB bilateral exchange rate continues to operate orderly within the mechanism which is based on market supply and demand and referenced to a basket of currencies. In early September, the surprisingly weak U.S. manufacturing data pushed back U.S. Federal Reserve rate-hike expectations, resulting in weaker dollar. Hereafter, as the U.S. economic data improved and Fed officials delivered rate-hike signals in succession, U.S. dollar index rebounded. At the same time, the foreign exchange demand resulting from oversea travel in the National Day Holiday was temporarily increased. Under both influences and according to the formation mechanism of “previous close + movements of a basket of currencies”, USD/RMB central parity ended in depreciation after initial appreciation and fluctuated in both directions. USD/RMB market exchange rate was relatively more stable. Throughout September, with the overall decline of U.S. dollar index and the off-peaking of foreign exchange purchasing during the summer, USD/RMB exchange rate appreciated slightly.
Recently, volatility of global financial market has been heightened again. With overall positive U.S. economic indicators, market participants expect it’s quite probable that U.S. Federal Reserve will raise interest rates in December, resulting stronger U.S dollar. The U.S dollar rose 1.22% during the Chinese National Day Holiday. Additionally, GBP/USD exchange rate once crashed to 1.1841 which is the lowest point in recent 31 years on concerns about the “Hard Brexit”. Besides, the greater depreciation pressure on Egypt pound also drags emerging economies’ currencies down. Based on the mechanism of “previous close + movements of a basket of currencies”, and referenced to the movements of the currency basket, the USD/RMB central parity quoted by the market makers on October 10 is 6.7008, which depreciates slightly from previous trading day, September 30. However, by contrast with currencies of developed economies and other emerging economies, RMB depreciates less and CFETS RMB index actually appreciates. While referenced to a basket of currencies, it is normal for USD/RMB exchange rate to either appreciate or depreciate, and to float bi-directionally in the future.
From the medium-long term view, given the fundamentals of current account surplus, the abundant foreign reserve, the balanced fiscal condition, and the robust financial system, there is no basis for RMB to depreciate continuously. RMB officially joined the IMF SDR currency basket on October 1, 2016, which will bring long-term oversea capital inflows and increased RMB assets holding demands, and further improve the demand and supply of the FX market. RMB exchange rate will remain generally stable at a reasonable and equilibrium level against a basket of currencies.
