Today, the Chinese central bank significantly strengthened the RMB against the US dollar midpoint by 160 points (to 7.1161 yuan), once again setting a new high since last November, and the strengthening is the largest since January of this year.
After the midpoint was released, the offshore RMB immediately broke through the 7.16 level, reaching a new high in nearly a month—this move was surprisingly aggressive.
First, the above news can easily be misinterpreted by the market. This is merely the response of the Chinese central bank to the sharp decline of the dollar last Friday, and not a new signal for appreciation, as today’s midpoint is significantly weaker than the market expectations (today only slightly strong by 366 points, while last Friday it was strong by 553 points). Do not overestimate the central bank's intentions.
In addition, the RMB is also weaker against a basket of currencies (CFETS index) today. This means that the RMB is only strong against the dollar, not against all currencies. To truly stabilize below 7.15, we still need to see if the dollar can continue to weaken.
Third, in the short term, the central bank may prefer a slightly stronger RMB. On one hand, this can stabilize investor confidence in the stock market, and foreign capital may gradually return; on the other hand, without a final agreement signed between China and the US, it sends a friendly signal and does not give Trump an excuse.
In the long term, maintaining strength depends on two factors: the pace of US interest rate cuts (although Powell hinted at rate cuts, it seems more like a 'forced acknowledgment of changing risks' rather than actively starting a loosening cycle) and the endogenous driving force of the Chinese economy (whether the stock market can stabilize and whether exports can rebound).
A final reminder: when the market forms a one-sided expectation that 'the RMB will only rise,' it is often not far from a reversal. This has occurred repeatedly over the past few years: the more one shouts 'breaking 7 will lead to a big rise,' the more likely a turning point will appear.