Breaking! The Chinese Yuan slumped nearly 500 points!

Compared with the offshore market, the yuan exchange rate in the onshore market fell less. on August 8, the yuan against the dollar spot exchange rate at 16:30 closing at 7.2133, compared with the previous trading day fell 213 basis points. After entering the night trading hours, the spot exchange rate of RMB against the US dollar fell below the 7.22 mark.

The second wave of RMB depreciation in 2023 has different characteristics from the previous fluctuations. In the first three waves of depreciation, the correlation between the RMB exchange rate and the effective exchange rate, the US dollar index, and the US-China interest rate spread was strong. However, in the current round of depreciation, the correlation between the RMB exchange rate and these variables weakened significantly. In addition, the first three waves of depreciation were mainly driven by external factors, so the US dollar index and the US-China spread led the fluctuations of the RMB-dollar exchange rate; however, in the current round of depreciation, internal factors are likely to be the dominant factors.

Important factors contributing to the depreciation of the RMB were China's poor economic performance in the second quarter, the failure of market-expected macro-stimulus policies, and weak market sentiment. On the macro side, investment and export growth declined, deflationary pressures intensified, and financial indicators deteriorated; real estate and local government debt problems also existed; on the external side, the Russian-Ukrainian conflict deepened, and the U.S.-China game is still ongoing.

Based on the above considerations, it is expected that the main factors dominating the RMB-dollar exchange rate trend in the second half of the year will remain internal. Under the optimistic scenario, if all the policies come to fruition, the RMB-dollar exchange rate will bottom out and reach 6.6-6.8 by the end of the year; under the pessimistic scenario, due to the impact of changes in the external environment, it is expected that the RMB-dollar exchange rate will be around 7.2 by the end of the year.