What is the situation with the RMB once again sluggish? What is the exchange rate like in September?

The continued strength of the US dollar index has driven the RMB to continue to decline against the US dollar.
On September 6th, the spot exchange rate of the Chinese yuan against the US dollar initially fell below the 7.31 mark, and then further fell below 7.32. As of the end of the press conference, it reached its lowest point in the session at 7.3248, breaking a new low since early November last year. Subsequently, the spot exchange rate of the Chinese yuan against the US dollar regained the 7.32 mark.
The offshore RMB/USD exchange rate, which reflects the expectations of international investors, also fell below the 7.32 level, reaching its lowest point in the session at 7.3277, a drop of over 200 points compared to the previous trading day.
After rising 0.67% in the previous trading day, the US dollar index, which reflects the trend of the US dollar against a basket of currencies, continued to rise on September 6th, hitting 104.88 during the session.
Multiple factors affect exchange rate fluctuations
Since the beginning of this year, the foreign exchange market has remained generally stable, and the RMB exchange rate has remained basically stable at a reasonable and balanced level. In August, the RMB depreciated against the US dollar, with both onshore and offshore RMB falling below 7.3 yuan. Data shows that on August 17th, the onshore RMB to USD exchange rate reached its lowest point at 7.3180, while the offshore RMB to USD exchange rate reached its lowest point at 7.3494, setting a new low since December 2022.
With the continuous strengthening of the US dollar index, the increase in the RMB to US dollar exchange rate caused by the central bank's announcement of lowering the foreign exchange reserve requirement ratio of financial institutions has been erased.
On September 1st, the central bank announced that starting from September 15th, 2023, the foreign exchange reserve requirement ratio of financial institutions will be lowered by 2 percentage points, that is, the foreign exchange reserve requirement ratio will be lowered from the current 6% to 4%. After the news was released, the offshore RMB rose significantly against the US dollar, rising by over 290 points at one point.
Experts say that the recent weakening of the RMB against the US dollar is mainly due to short-term pressures, including changes in interest rate differentials caused by the divergence of monetary policies between China and the United States, and periodic strengthening of the US dollar exchange rate. In the medium to long term, the RMB exchange rate continues to maintain basic stability at a reasonable and balanced level, with solid fundamental support

The US dollar index continued to strengthen after mid April, and although it has fallen since June, it remains at a high level, creating passive depreciation pressure on the RMB exchange rate. Recently, the RMB exchange rate has been under significant pressure due to the high volatility of the US dollar index. The key influencing factors for the subsequent stabilization or even appreciation of the RMB still lie in the extent and sustainability of the repair of domestic economic fundamentals, especially the repair of domestic demand Mingming Analysis, Chief Economist of CITIC Securities.

Wen Bin, Chief Economist of China Minsheng Bank, believes that there are three reasons for the depreciation of the RMB exchange rate this round: firstly, the slowdown in domestic economic recovery, which is the main reason for the depreciation of the RMB this round; Secondly, the continued tightening cycle of the Federal Reserve also puts passive pressure on the RMB; Thirdly, regulatory authorities have maintained a high tolerance for exchange rate depreciation, which has enabled them to increase the space for monetary policy regulation.
The National Economic Research Center of Peking University analyzed that the inverted interest rate difference between China and the United States and the divergence of monetary policy were the main factors affecting the trend of the RMB exchange rate in August. The domestic economic fundamentals are weak, the US dollar index has rebounded strongly, and the central bank has cut interest rates beyond expectations, suppressing the RMB exchange rate.
The People's Bank of China recently released the "2023 Second Quarter China Monetary Policy Implementation Report", which shows that in the first four months of this year, the overall exchange rate of the RMB against the US dollar remained stable, with a cumulative appreciation of 0.6% in the middle price. Entering May, the interweaving of internal and external factors has increased the pressure on the depreciation of the RMB exchange rate. Firstly, the expectation of the Federal Reserve raising interest rates has been repeated, and the already weakened expectation of the Federal Reserve raising interest rates at the beginning of the year has once again risen, providing support for the rise of the US dollar. Second, the US debt ceiling and geopolitical risks have boosted the risk aversion in the market and helped the US dollar rise. Thirdly, the domestic seasonal demand for foreign exchange purchases expands the gap between foreign exchange supply and demand. June to August is the dividend season for Hong Kong stocks, and most of the dividend funds of listed companies need to be settled through foreign exchange purchases. The demand for cross-border tourism and overseas study abroad to purchase foreign exchange has also significantly increased after the epidemic.
The RMB exchange rate may continue to be in a bottoming out stage
Since September 4th, the offshore RMB has depreciated again. Looking ahead to the future, the National Economic Research Center of Peking University believes that with the frequent occurrence of favorable policies, the domestic economy may stabilize and rebound, and market expectations will gradually stabilize. The central bank will timely use stable exchange rate tools, which will form a supporting role for the RMB in the future. Therefore, it is expected that the RMB exchange rate will fluctuate in both directions between 7.20 and 7.35 in September.
In addition, the central bank announced on August 15th that it will carry out a 204 billion yuan open market reverse repurchase operation and a 401 billion yuan medium-term lending facility (MLF) operation, fully meeting the needs of financial institutions. The announcement shows that the winning interest rates for reverse repurchase and MLF are 1.80% and 2.50% respectively, with previous values of 1.90% and 2.65% respectively, and a 10 and 15 basis point reduction respectively.
Analysis by Dongguan Securities shows that the unexpected interest rate cut on August 15th indicates that the current central bank's monetary policy is more focused on me, and it is expected that the loose monetary policy will continue in the future. The interest rate difference between China and the United States will remain high, and the short-term exchange rate elasticity will be relatively relaxed.
CICC pointed out that the RMB exchange rate may continue to face a more complex and severe internal and external environment in September, with a low probability of a significant decline in the US dollar index and US bond yields in September. Internal factors will continue to be weak in September, but the possibility of further deterioration is also low. Therefore, it believes that the RMB exchange rate may continue to be in a bottoming out stage under the maintenance of a stable exchange rate policy, waiting for positive changes in internal and external fundamental conditions, The rebound market may start.