How Is The RMB Exchange Rate Running?

Recently, a small number of media continuously released false information about the RMB exchange rate, misleading public opinion at key time points, disrupting the normal operation order of the foreign exchange market, and objectively helped some market opportunistic forces to short the renminbi.

We strongly condemn this violation of journalistic ethics and irresponsible behavior and reserve the right to pursue relevant responsibilities through legal means.

2016 in the first half of the year, the RMB exchange rate fluctuate. On the last day of June, there was another duel.

Yesterday at three p.m., the offshore RMB against the US dollar suddenly plunged more than 400 basis points in a short span of 10 minutes, fell below 6.7 and hit the lowest point since February, 6.7021.

The diving was caused by a Reuters report.

"To support the economy, the Central Bank of China is willing to allow the yuan to fall to 1 yuan to 6.8 yuan in 2016," Reuters quoted an unnamed person close to policy makers.

In addition, the Central Bank of China reported in its mid year work report that the government's debt reduction level will increase the risk of default on bonds, thereby increasing the difficulty of raising funds.

This report immediately stimulated the market, allowing some speculators to smell opportunities for profit.

The offshore renminbi has plunged from the US dollar against the US dollar, dropping to 6.7021 yuan from the level of 6.6600 yuan, and dropped more than 400 points in more than 10 minutes.

On the shore, the RMB also dived against the US dollar and dropped by about 100 points in more than 10 minutes.

Of course, this decline did not last for a long time, because the central bank was angry, and at 5:51 p.m. in the official website emergency voice and rumor, making the offshore RMB exchange rate recovered before yesterday's close, reported 6.6599.

What did the central bank say in anger?

Statement issued by the people's Bank of China on the operation of the RMB exchange rate

In recent years, the international foreign exchange market has been greatly affected by Britain's "off Europe" effect, and the RMB has depreciated against the US dollar exchange rate.

But on the whole, the RMB exchange rate is still operating in accordance with the existing mechanism of the exchange rate of the former day and the exchange rate of a basket of currencies, and the RMB exchange rate for a basket of currencies has remained basically stable, and the market is expected to be stable.

At present, China's economy is expected to continue to maintain rapid growth in the medium and high speed, with strong international competitiveness, favorable balance of payments, abundant foreign exchange reserves, better financial conditions and stable financial system. China does not intend to enhance its competitiveness through devaluation of the RMB exchange rate. The fundamentals of China's economy determine that there is no foundation for long-term depreciation of the RMB.

China will unswervingly push forward the marketization of exchange rate reform and further play the decisive role of the market in the formation of exchange rate. The RMB exchange rate will continue to operate in accordance with the formation mechanism based on market supply and demand and reference to a basket of currencies, and maintain stable stability at a reasonable and balanced level.

In the first half of this year, the central bank and the foreign exchange bureau have made 12 public clarifications on the above issues, 11 of which are related to the foreign exchange policy.

Just this week, the central bank has responded 3 times about the operation of the RMB exchange rate, the restart of interest rate control and the rumors of "stopping individual investment and purchasing foreign exchange".

In view of this, the use of foreign capital by international capital to report the massive offshore shorting of Renminbi is not targeted.

The reporter interviewed a foreign bank trader to expose the ugly face of the renminbi's empty power.

"Before, many hedge funds bought offshore renminbi put options due at the end of June, and the execution price was basically between 6.7-6.8."

A foreign exchange trader at a foreign bank revealed.

As far as he knows, the trading of such put options is at least over 2 billion dollars.

The main reason why hedge funds dare to buy such offshore renminbi put options is that they expected a sustained depreciation of the yuan at the beginning of the year, which would lead to a sharp contraction in China's foreign exchange reserves, increasing pressure on capital outflow and forcing the central bank to sharply reduce the RMB exchange rate.

However, with the gradual stabilization of China's foreign exchange reserves over the past two months and the slowing pace of US dollar interest rate raising, the offshore renminbi has been hovering below the 6.6 against the US dollar.

"Before mid June, many hedge funds earlier levelled off such short selling options."

The foreign exchange trader recalls.

But what he did not expect was that the black swan incident in Britain led the left behind to see the odds. The rise of the US dollar as the global high risk of investment in risk aversion caused the offshore renminbi to face a higher pressure of devaluation.

He found that from Monday, these hedge funds began to spare no effort to reduce the offshore RMB exchange rate, and even to offshore banks to borrow large quantities of offshore renminbi to convert into dollars, artificially "enlarge" the amount of RMB selling, thereby further reducing the offshore RMB exchange rate.

However, as the global stock market bottomed out against the pound sterling euro in June 29th, the offshore renminbi exchange rate began to stabilize and rebound in the vicinity of 6.6, making their option short selling arbitrage strategy frustrated again.

"On the 30 day, they must put all their eggs in one basket."

The foreign exchange trader said that if the offshore RMB exchange rate could not reach 6.7 above the 30 day's closing date, the short selling options of these hedge funds would be invalidation or even lose a lot of royalties.

This forced them to take advantage of it.

The market rumors that the renminbi is supposed to be depreciated to 6.8 within the year has been largely suppressed by the offshore RMB up to 6.7.

Many foreign exchange traders point out that such market rumors are not new.

At the beginning of the year, they received reports from several large international investment banks, predicting that the RMB exchange rate against the US dollar would fall to around 6.8 in the year.

"Obviously, they want to take advantage of this market rumor as a pretext for short selling of the renminbi, so as to realize their options income."

The foreign exchange trader said.

He even found that during the 10 minute drop of offshore RMB over 400 basis points, many hedge funds once bought more than 10 times of their leverage from foreign exchange broker to buy and sell offshore.

It seems that the offshore renminbi will fall directly below the low point of 6.7585 in the year, resulting in a higher return on options.

However, when the offshore RMB exchange rate fell below the 6.7 integer mark, the market suddenly poured out a large number of RMB to pay the bills, and quickly reversed the offshore RMB declines.

"Market speculation is likely to be the result of intervention by the Central Bank of China through the intervention of Chinese banks."

A hedge fund manager told reporters.

After all, with

In the event that the renminbi has depreciated, institutions and enterprises are not willing to buy foreign currency at this time. It is only for a short time to turn the renminbi offshore to stabilize the offshore RMB exchange rate, only the Central Bank of China.

The central bank's handling is fast and effective, but as the chief economist of Bloomberg Asia and Chen Shiyuan, economist at Bloomberg, wrote yesterday, the extreme reaction of the market clearly illustrates three things:

First, the market immediately believes in rumors that policymakers tend to depreciate the renminbi, highlighting the fact that the market still believes that the weaker renminbi is part of the government's stimulus package.

Second, the Central Bank of China is still the dominant force in determining the level of exchange rates, as long as anonymous news about the central bank's preference for specific exchange rates will change the exchange rate in that direction immediately.

Third, the Central Bank of China needs to further concentrate on its communication strategy. If the market can understand the attitude of the central bank, rumors will not trigger a sharp fluctuation in the exchange rate.

So, is the central bank willing to intervene in the foreign exchange market? What kind of trend does the central bank hope for the RMB exchange rate?

In view of this, the central bank may have two intentions at present.

First, we should not use foreign exchange reserves as far as possible to stabilize the RMB exchange rate.

Two, in the absence of a short-term depreciation of the renminbi in the United Kingdom, the pace of devaluation of the RMB should be regulated step by step to avoid the rapid depreciation of the RMB and to provide opportune opportunities for the international speculative capital.

This can be seen from the price parity between the central parity of RMB and the overnight closing price.

In the past 3 trading days, the central parity of RMB is higher than the closing price of the last trading day, which is unusual.

A Hongkong bank foreign exchange trader analysis said that if the RMB intermediate price formation mechanism is referred to "the day before yesterday's closing exchange rate plus a basket of currencies exchange rate changes", when the middle price is higher than the previous day's closing exchange rate, it shows that the RMB exchange rate with a basket of currencies shows an appreciation trend.

But considering that the RMB exchange rate index (CFETS) is still on a downward trend, this seems to indicate that the central bank has quietly adjusted the weight of a basket of currencies linked to the renminbi, so that the renminbi will be on a basket of appreciation, thereby making the middle price higher than the overnight closing price.