Translation in English: With only a 100-point fluctuation up and down in a week,

Over the past week, the fluctuation of the onshore and offshore RMB exchange rates has almost disappeared, with a weekly fluctuation range of about 100 points, which continued to narrow compared to the previous week. Last week, the onshore RMB against the US dollar closed at 7.1960, with a weekly increase of 0.03%.

Several foreign bank traders and strategists have told reporters that the US Dollar Index has been stronger than expected recently, approaching 104, while the People's Bank of China (PBOC) continues to send stability signals through the midpoint rate. The deviation of the daily midpoint rate from the model is between 800 and 900 points, and the midpoint rate is set around 7.1.

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International institutions and investors are speculating about the next direction of the RMB. Wang Ju, the head of Greater China foreign exchange and interest rate strategy at BNP Paribas (hereinafter referred to as "BNPP"), mentioned in an email to Yicai that the RMB exchange rate may still fluctuate within the range of 7.1 to 7.3, as the midpoint rate is stable around 7.1. "We are waiting for a catalyst to break through this range. If the Federal Reserve implements a significant rate cut, it may help the RMB to appreciate. Otherwise, external uncertainties may lead to RMB depreciation."

Currently, most institutions predict that the RMB exchange rate will be between 7 and 7.2 before the end of the year. The more cautious predictions from BNPP and Barclays are 7.3 to 7.4 and 7.35, respectively.

The RMB fluctuation range has narrowed significantly. As of the closing at 18:30 on March 4, the onshore RMB against the US dollar was reported at 7.1994, the offshore RMB against the US dollar at 7.2119, and the US Dollar Index at 103.772.

Traders have indicated that the fluctuation of the RMB exchange rate has been narrowing week by week. Zhang Meng, a macro and foreign exchange strategist at Barclays, told reporters, "In recent client meetings, clients have generally asked whether China might devalue the RMB in the future to release pressure. However, we believe that China will continue to defend the RMB from pressure through the midpoint rate, and the central bank still has ample ammunition."

Before November last year, when the RMB faced the greatest depreciation pressure, the exchange rate once broke through 7.3, with the midpoint rate deviation reaching as high as 1000 points and lasting for a long time. Subsequently, the RMB rebounded, reaching close to 7.08, but has weakened again since 2024. Currently, the PBOC is still stabilizing the exchange rate through the midpoint rate, which also partially explains the recent narrow fluctuation range.

Overseas investors are very curious about the next direction of the exchange rate. In addition to the recent narrow fluctuation range, the path of the "impossible trinity" is not easy. "The PBOC faces dual pressures of RMB depreciation and market funding cost stratification, which may hinder the flow of funds to the real economy. A larger-than-expected reserve requirement ratio (RRR) cut and a reduction in the 5-year loan prime rate (LPR) indicate that the central bank is more inclusive in meeting the needs of stable growth and the financial market." Wang Ju said.

Zhang Meng told reporters that the market is speculating whether China will use exchange rate depreciation as a way to partially release pressure. In the early years, the IMF also mentioned on several occasions during an interview with Yicai that the exchange rate is an "absorber" of economic pressure.Data indicates that the manufacturing PMI for February was 49.1%, below the boom-or-bust line, suggesting a weak prosperity in the manufacturing sector. Sub-indicators show weak production and poor demand, in line with the seasonal characteristics around the Spring Festival; the price of raw materials purchased decreased month-on-month, but the ex-factory price increased, which is conducive to an improvement in corporate profit margins; the prosperity in the construction industry in February was weak, but the service industry's prosperity rebounded, which is closer to the micro-feelings of residents around the Spring Festival; however, the most concerned real estate data still needs to rebound. In February, the transaction area of new houses in 54 cities decreased by 60% year-on-year, and the new housing data was not good, but the performance of second-hand houses was relatively better, with a significant recovery in the number of visits to housing projects after the festival; in addition, this week will see the release of February's inflation and social financing data, and institutions expect the February inflation data to be weak, while social financing data requires attention to the decline in M2 growth rate and whether the M1 growth rate has resilience.

In the near term, it still depends on the Federal Reserve's policy.

For the yuan, the long-term external pressure comes from the geopolitical level, but for most of this year, the changes in the Federal Reserve's monetary policy are still the most critical variable.

Earlier, the market once thought that the Federal Reserve would start cutting interest rates in March, but the U.S. economy and employment data exceeded expectations, and inflation has not returned to the target. Currently, Goldman Sachs expects the first interest rate cut to start in June, leading to stronger-than-expected resilience in the U.S. dollar.

Last Friday's U.S. inflation data recorded the lowest growth rate in nearly three years, but the core PCE increased by 0.4% month-on-month, a new high in a year, but the February ISM manufacturing PMI was significantly lower than market expectations. After a series of data releases, the market's bets on interest rate cuts have not changed significantly, still expecting about 80BP of interest rate cuts for the year, possibly starting in June, which is almost consistent with the Federal Reserve's earlier forecasts.

In addition, the three major U.S. stock indexes continued to rise, with 16 out of the past 18 weeks closing higher, with the S&P and Nasdaq setting new closing highs for two consecutive days. Nvidia has risen for eight consecutive weeks, and its stock price has unsurprisingly set a new high again, with a market value breaking through 2 trillion U.S. dollars. AMD's stock price soared by 15% in a week. Institutions believe that the wealth effect brought by the stock market has also led to stronger-than-expected resilience in U.S. consumption.

Last week, the U.S. dollar index fell for two consecutive weeks and closed below the 104 level, but recently, both the euro and the yen have been very weak, making it difficult for the U.S. dollar to weaken substantially. The euro climbed slightly above 1.0800, and the yen against the U.S. dollar fluctuated more in the last two trading days but closed above 150 for the third week, near the weakest level in history. The Bank of Japan's interest rate hike process may only show signs in April at the earliest.

Wang Ju believes that if the Federal Reserve implements a significant interest rate cut, it may help the yuan to appreciate again. "Anyway, in our view, the yuan is likely to continue to act as a financing currency globally, and it will maintain a short-term fluctuation range of 7.1 to 7.3."

Zhang Meng believes, "Overall, we believe that China will defend exchange rate stability. However, it is impossible to completely avoid a strong U.S. dollar, so we maintain our previous forecast that by the end of the first quarter of 2023, the U.S. dollar/yuan exchange rate will reach 7.35, and the CFETS basket of currencies index will reach 92 (currently over 98)."