Offshore RMB/USD Exchange Rate Breaks “7”

On September 15th, when the People’s Bank of China (PBC) lowered the foreign exchange deposit reserve ratio, on the same night, the exchange rate of the offshore Renminbi (RMB) against US Dollar fell below the integer mark of “7 to 1”. This is the first time after two years that the RMB fell to 7 Yuan again.

 Starting from September 15th, 2022, the PBC has reduced the foreign exchange deposit reserve ratio of financial institutions by 2 %, lowering from the current 8% to 6%. On the same day, the offshore RMB/USD exchange rate was fluctuating around 6.97 for a whole day prior to the further depreciation after midday exchange. At 5 PM, the offshore exchange rate jumped from 6.9777 all the way to 7.0187, back to the level in July 2020. Compared to the closing rate of 6.9775 of onshore RMB exchange rate/USD, announced by China Foreign Exchange Trading System, a deeper devaluation of 145 basis points is on dashboard from the official closing price of 6.9630 Yuan from the previous day.

 The RMB exchange rate has been under pressure recently due to the weak Euro and the rate hiking of the US Federal Reserve hawks. Since August, the offshore RMB has been depreciated by nearly 4% and the onshore RMB also down more than 3.5%.

 The observers pointed out that the “7” breakpoint is a landmark event. With the PBC’s determination and strength to protect “7”, the reduction of the foreign exchange deposit reserve ratio is adopted to stabilize the market. However, strong expectation of RMB devaluation is very obvious if easy breakdown of the significant psychological barrier and no patience for the Federal Reserve next week’s release of interest rates is showing. “7” breakpoint indicates that PBC is incapable to block the devaluation of RMB. Also, once such expectations are formed whether short-sellers or hot money in a wait-and-see attitude will eventually accelerate the depreciation of the RMB.

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