On January 3rd, the central parity rate of the Chinese yuan against the US dollar was 7.1002, a decrease of 232 basis points from the previous trading day. The decline is the largest since June 26, 2023, marking the first time it has been reduced since the new year.

　　The onshore and offshore RMB/USD exchange rate continues to decline. On January 2nd, the onshore Chinese yuan closed at 7.1320 against the US dollar, down 400 points from the previous trading day. At 03:00 on January 3rd, the onshore RMB closed at 7.1429, a 451 point decrease from the closing price of the previous trading day; The offshore RMB/USD ratio was at 7.1491 at 05:59 on the 3rd, down 233 points from the end of the previous trading day. As of 10:00 am on the 4th, onshore RMB to USD was at 7.1540 and offshore RMB to USD was at 7.1625.

　　Lowering the middle price can avoid the expectation of unilateral appreciation

　　Market insiders pointed out that at the beginning of the year, the risk aversion sentiment in the European and American markets increased, driving up the US dollar index and putting pressure on the short-term RMB exchange rate. Market insiders say that the exchange rate formation mechanism of the Chinese yuan's central parity rate is not only pegged to the US dollar, but also strengthens the reference to a basket of currencies, that is, to maintain basic stability of the basket of exchange rates. This is the main tone of the RMB exchange rate formation mechanism.

　　Since November 2023, the US dollar index has rapidly fallen by 4.19% to 102.2, and non US currencies have appreciated. Since November, the CFETS RMB exchange rate index against a basket of currencies has not appreciated, but has depreciated by 1.9%. The central bank's 232 basis point depreciation of the central parity rate today is actually an operation of the central bank within the framework of the exchange rate formation mechanism.

　　From September 15 to November 15, 2023, the central parity rate of the Chinese yuan fluctuated within a very narrow range of 7.17-7.18, with relatively small elasticity not being the norm. With the improvement of the misaligned monetary policy cycles between China and the United States, the easing of pressure on the RMB exchange rate will bring the fluctuation of the RMB exchange rate back to normal.

　　The short-term RMB exchange rate is likely to exhibit a volatile consolidation trend

　　Che Meichao, Senior Analyst at the Macro Strategy Department of Yide Futures, stated that on January 2nd, the demand for safe haven in the market drove the US dollar index up significantly, putting pressure on non US currencies. Market sentiment drove market makers to significantly lower their quotes, directly driving a correction in the middle price of the US dollar against the Chinese yuan exchange rate.

　　Wang Qing, Chief Macro Analyst at Orient Financial Holding, stated that the US dollar index rose significantly by 0.91% on the first trading day of the new year. As the closing exchange rate on the previous trading day was an important basis for pricing the central parity rate of the Chinese yuan, there was a certain degree of decrease in the central parity rate on January 3rd. Overall, in recent times, the RMB exchange rate has mainly fluctuated in the opposite direction of the US dollar index, and the fluctuation range is generally similar, without any significant intrinsic appreciation or depreciation momentum.

　　Fan Ruoying, a researcher at the Bank of China Research Institute, said that the central parity rate between the US dollar and the Chinese yuan has been hovering around 7.1 recently. The fluctuation of the RMB exchange rate at certain time points is a normal phenomenon. The short-term RMB exchange rate is likely to exhibit a volatile consolidation trend.

　　South China Futures believes that the trend of the RMB exchange rate will ultimately return to internal factors. Considering the current market background, it is expected that the RMB exchange rate will have a long way to go in the future, but the possibility of a significant depreciation will gradually decrease. Taking history as a lesson, the appreciation trend of the RMB before the beginning of the year is worth paying attention to. In summary, it is expected that the RMB exchange rate will operate within a range of 7.065-7.175 from January 2nd to January 5th this week.

　　The RMB exchange rate is expected to fluctuate slightly and strengthen in 2024

　　Looking ahead, Wang Qing pointed out that as the Federal Reserve's interest rate hike process comes to an end and is expected to initiate a rate cut in the first half of this year, market sentiment is undergoing a reversal, and it is not ruled out that the US dollar index may fall below the 100 mark in the first quarter. In the short term, there is still some potential for appreciation of the Chinese yuan against the US dollar, and there is a possibility of stable entry into the range below 7.1. The CFETS and other three major basket exchange rate indices that better reflect the true level of the Chinese yuan exchange rate will be mainly stable.

　　In 2024, the domestic economy will further return to a normalized operating level, and the internal depreciation pressure of the renminbi will weaken. In addition, the US dollar index is prone to decline but difficult to rise, and the renminbi is expected to fluctuate in both directions between 6.8 and 7.2. The central exchange rate of the renminbi against the US dollar will slightly rise compared to 2023, and the three major renminbi basket exchange rate indices, including the CFETS, will continue to remain stable. However, until the domestic real estate industry clearly shows a trend of recovery, the possibility of the RMB continuing to enter the appreciation channel in 2024 is also unlikely.

　　According to a report by Puyin International, the weakening of the US dollar index in 2024, narrowing of the US China interest rate spread, and China's economic recovery entering the right track will drive a mild appreciation of the RMB exchange rate.

　　On December 27, 2023, the Monetary Policy Committee of the People's Bank of China held its fourth quarter meeting for 2023. The meeting mentioned deepening the market-oriented reform of exchange rates, guiding enterprises and financial institutions to adhere to the concept of "risk neutrality", comprehensively implementing policies, correcting deviations, and stabilizing expectations, resolutely correcting pro cyclical behavior, resolutely preventing the risk of exchange rate overshoot, preventing the formation of unilateral consensus expectations and self strengthening, and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.