Entering the second half of 2024, the renminbi will continue to be under pressure in the foreign exchange market. On July 3rd, the offshore RMB/USD exchange rate fell below 7.31 during trading. However, on July 4th, both onshore and offshore RMB/USD exchange rates slightly rebounded, with the RMB/USD central parity rate raised by 7 basis points. In the view of analysts, the strengthening of the US dollar has led to a general decline in non US currencies. Looking ahead to the future, although there is pressure on the RMB exchange rate, the depreciation space is limited, and the probability of breaking through the previous high is not high. The RMB exchange rate is expected to continue to fluctuate in both directions near a reasonable equilibrium level. Offshore fell below 7.3. On July 4th, the People's Bank of China authorized the China Foreign Exchange Trading Center to announce that the central parity rate of the RMB exchange rate in the interbank foreign exchange market on July 4th, 2024 was 7.1305 yuan per US dollar, compared to 7.1312 yuan on the previous trading day, with a daily increase of 7 basis points. On the same day, the onshore RMB opened 12 basis points lower against the US dollar, and the intraday opening price was 7.2703; The offshore RMB opened slightly higher against the US dollar by 3 basis points, with a daily opening price of 7.3028. As of 17:00 on July 4th, the onshore RMB to USD exchange rate was 7.2701, and the offshore RMB to USD exchange rate was 7.2938. However, on July 3rd, the onshore and offshore RMB to USD exchange rates fell to a new low since mid November last year. Among them, the offshore RMB to USD exchange rate briefly fell below 7.31 yuan, with the lowest intraday price at 7.3115 and fluctuating around 7.3, with an amplitude of 0.27%. Just one week later, the offshore renminbi has once again fallen against the US dollar. What constitutes the pressure on the renminbi exchange rate in this round? In terms of the international environment, the US policy interest rates continue to remain high, while the European Central Bank, Bank of Canada, and Swiss Central Bank have turned to rate cuts, bringing widespread downward pressure on strong US dollars and non US currencies. Since June, the central banks of non US developed economies such as the European Central Bank and the Swiss Central Bank have successively lowered interest rates, further widening their monetary policy gap with the Federal Reserve. Meanwhile, the uncertainty of European politics has caused some disturbance to investors' emotions The Chief Economist of CITIC Securities explained clearly that with the support of interest rate spread factors and safe haven sentiment, the US dollar index has returned to a high of 105 or above. Correspondingly, non US currencies are under significant pressure, and the offshore exchange rate of the spot US dollar against the Chinese yuan briefly broke through the 7.3 mark. It is worth noting that this round of pressure on the RMB against the US dollar exchange rate is expected to be a passive depreciation under the strengthening of the US dollar index. Zhou Maohua, a financial market analyst at Everbright Bank, further stated that although the performance of inflation, retail, and real estate in the United States fell short of expectations, indicating a slowdown in the economy, the performance of non farm employment in the United States was strong, and inflation continued to be high with upward risks. Therefore, the Federal Reserve is cautious in lowering interest rates; The European Central Bank took the lead in lowering interest rates, and the divergence of administrative policies between the US and European central banks, coupled with increased political uncertainty in Europe, dragged down the performance of the euro, all of which pushed the US dollar higher in June. The strengthening of the US dollar has led to a slight decline in the value of the Chinese yuan against the US dollar. Regarding the heated discussion of falling below the 7.31 mark, analysts also remind the market to maintain stable confidence. "The breakthrough of simple psychological barriers and landmark points is actually digesting and regulating short-term supply and demand pressures through market-oriented fluctuations in exchange rates." Pang Ming, Chief Economist of JLL Greater China, emphasized that considering the policy aspect, we will continue to strengthen macro prudential management and expectation guidance, continue to improve cross-border fund flow monitoring, warning and response mechanisms, and continue to resolutely correct pro cyclical and unilateral behavior. It is expected that the large fluctuations of the RMB exchange rate can be completely avoided, and will not present a "unilateral market" situation in the long term. We will still maintain two-way fluctuations and dynamic equilibrium. On July 3rd local time, the Federal Reserve released the minutes of its monetary policy meeting in June, with limited room for depreciation. It shows that inflation has eased in the past year, but remains at a high level. The Federal Reserve will still be highly concerned about inflation risks. At the same time, members unanimously believe that lowering the target range for interest rates is inappropriate until they have greater confidence in inflation continuing to move towards 2%. Zhou Maohua analyzed that the June Federal Reserve meeting released several pieces of information, including a slowdown in the economy and employment, easing price pressures, and maintaining restrictive policies. Meanwhile, the current outlook for the US economy and inflation is slowing down, and if this trend continues, the Federal Reserve may still initiate interest rate cuts within the year. However, the US economy and inflation prospects still have a certain degree of "bidirectional" nature, and the timing of the Federal Reserve's interest rate cut requires data guidance. In Zhou Maohua's view, in the face of the still vague prospect of interest rate cuts by the Federal Reserve, policies need to be prepared on both sides and deal with two-way risks. From the perspective of impact, the US economy is slowing down, and if the Federal Reserve gradually transitions to a rate cutting cycle, it will constrain the upward space of the US dollar. But it should also be noted that the current Federal Reserve continues to maintain interest rate restrictions, coupled with uncertainty in the US election and European political prospects, pressure on the depreciation of the yen, and imbalances in US bond supply and demand, all of which may provide some support for the US dollar. This also further suggests risks for the renminbi - the outlook for the Federal Reserve's policy is unclear, and the policy differentiation of central banks around the world will increase fluctuations in the global foreign exchange market. However, as the President of the People's Bank of China, Pan Gongsheng, previously stated at the 2024 Lujiazui Forum, "the People's Bank of China has also gained more experience in dealing with fluctuations in the foreign exchange market. This year, major economies have gradually shifted their monetary policies, the appreciation momentum of the US dollar has weakened, and the cyclical differences in monetary policy at home and abroad have tended to converge. These factors work together to maintain the basic stability of the RMB exchange rate and balance cross-border capital flows, expanding the operational space of China's monetary policy.". Looking ahead to the future trend of the RMB exchange rate, analysts believe that although the bilateral exchange rate of the RMB against the US dollar continues to face certain pressure in the short term, from the perspective of internal and external environments, the RMB exchange rate is expected to continue to fluctuate in both directions near a reasonable equilibrium level. The more important support for the renminbi may lie in the strength of the People's Bank of China's exchange rate stabilization tools. Mingming stated that in the future, considering the strength of the US dollar or its continued maintenance, the basic account (i.e. current account and direct investment account) can still maintain a certain scale of surplus on the domestic side, which can play a certain role in providing support. Although there is pressure on the RMB exchange rate, the depreciation space is limited, and the probability of breaking through the previous high is not high. Pang Ming pointed out that from the perspective of economic fundamentals, China's economic operation continues to show an upward trend, macro indicators and micro subject perception continue to improve, and the strength of macroeconomic regulation, policy effectiveness, and development quality are steadily improving; From the perspective of investors, whether from the perspectives of diversified allocation, long-term operations, or exchange gains and losses, the overall trend of paying attention to and increasing the allocation of non US dollar assets will not change. Renminbi assets with low correlation with the global market, strong hedging attributes, good yield stability, high long-term investment value, and strong liquidity are still attractive; From a policy perspective, relevant departments will continue to strengthen effective management and reasonable guidance of market expectations, and the tool options retained in the future policy toolbox will still be relatively sufficient. Based on this, it is expected that the decisive role of the market in the RMB exchange rate will be upheld, the elasticity of the RMB exchange rate will be enhanced, the risk of exchange rate overshoot will be effectively prevented, the power and mechanism of exchange rate correction will be sound, the RMB exchange rate will steadily rebound, moderately strengthen, and continue to maintain basic stability at a reasonable equilibrium level. (Lai Xin She)