With the release of signals of stable exchange rate and Yellen's visit to China imminent, the RMB rebounded to around 7.2

The renminbi briefly depreciated to near 7.3, but regulators rarely signaled stability until last week. At the beginning of the week, the renminbi stabilized and rebounded, and as of 18:20 Beijing time on July 4, USD/CNY was at 7.2196, and USD/CNY was at 7.2264, a one-day rebound of nearly 300 points.

Last Tuesday (June 27), the deviation of the middle price was large, and a number of traders and strategists told reporters that the mid-price on the 27th released a stable signal, which was more than 100 points stronger than the model predicted, which is a rare deviation this year; Over the weekend, the market began to expect that the yuan had entered the bottom range; News of U.S. Treasury Secretary Janet Yellen's upcoming visit to China also boosted risk sentiment.

In addition, a number of major domestic banks have recently lowered the interest rate on US dollar deposits, which may help reduce spread arbitrage. The effect of lowering the US dollar deposit interest rate on stabilizing the exchange rate will be quite obvious, because the Fed's sharp interest rate hike makes the US dollar interest rate much higher than the RMB interest rate, resulting in many foreign trade enterprises are more willing to hold US dollars and deposit in banks to earn higher interest income, and the decline in corporate willingness to settle foreign exchange has also aggravated the depreciation pressure of RMB.

According to the reporter, the current stock of US dollar deposits in China's banking system is about 800 billion US dollars, and about 500 billion US dollars in China. However, a number of joint-stock banks and city commercial bank personal gold business personnel told reporters that the US dollar deposit interest rate has not been lowered, some are still around 5.1%, and the interest rate reduction is mainly state-owned banks. The current US dollar interest rate of around 2.8% is slightly higher than the 1-year RMB deposit rate.

Whether the RMB exchange rate reverses here, institutional sources believe that it remains to wait and see, especially the US economic data far exceeded expectations, and the market seems to be still expecting China to introduce more stimulus policies, including RRR and interest rate cuts.

Song Yu, chief China economist at BlackRock, recently told the first financial reporter that unlike the global trend, China's inflation tends to decline and has negative growth month-on-month, which has led to a sharp rise in China's real interest rates. "At the same time, China's economic recovery momentum is facing certain challenges, I think the current level of interest rates is high, so it is reasonable to continue to cut interest rates recently, and the previous 10BP rate cut is not enough, at least to ensure that real interest rates do not climb significantly." Still, he said the exchange rate issue could be a concern in front of a rate cut.

As far as the international environment is concerned, the US dollar index fell slightly in January ~ June, the British pound led the G10 currency, and the RMB depreciated by nearly 5% in the first half of the year, judging the future trend of the RMB, the US dollar trend, the US economy and the Fed's policy are crucial.

Economic data on Friday showed that the US PCE price index fell significantly from 4.3% to 3.8% in May, breaking 4 for the first time in two years, but the core PCE only fell slightly to 4.6%, and the dollar index fell sharply, but stood at 102.65 on Tuesday to recover lost ground. Due to strong economic data, it is expected that the Fed may still raise interest rates twice cumulatively in July and September this year.

Joshua Warner, a senior analyst at GAIN Capital Group, told reporters that the recently released US heavy economic data once again reflected economic resilience - due to strong consumer spending growth, the final GDP growth rate in the first quarter was revised sharply upward than expected, and the US GDP in the first quarter of 2023 increased by 2% year-on-year, up 0.7% from the revised data released earlier, exceeding market expectations of 1.4%; Last week, initial jobless claims fell by 26,000 month-on-month, the biggest drop since October 2021. This has also raised expectations for continued rate hikes during the year. Fed Chairman Jerome Powell recently signaled that two more rate hikes are likely this year. Traders expect the Fed to raise interest rates twice more this year with a nearly 50% probability.

There are also a number of key data traders paying special attention to this week, especially the minutes of the Fed's June meeting on Thursday and the US non-farm payrolls report for June on Friday.

Warner told reporters that after unexpectedly adding 339,000 non-farm payrolls in May, the market expects 225,000 new jobs in June, the unemployment rate remains at 3.7%, and hourly wage growth is expected to fall slightly to 4.2%. A strong job market suggests that the economy may be able to avoid or delay a recession, but it also means that inflation will continue to plague the Fed's decisions. Better-than-expected data will clearly give the market more confidence in the median interest rate of 5.6% at the end of the year, which will continue to push the dollar upward while weighing on gold; As far as the minutes of the June meeting are concerned, at the June FOMC meeting, Powell said that there is still room for two rate hikes this year and that no rate cuts are considered, and Powell did not rule out the possibility of back-to-back rate hikes in public remarks since then. The minutes will reveal the expectations and divergences of members on the outlook for interest rates, but hawks are expected to prevail.

However, the UBS CIO office told reporters that the dollar's performance was mixed, and the dollar trade-weighted index fell rapidly in the first half of June and only recently began to stabilize. In the second half of the month, investors also lowered their expectations for rate cuts at the end of this year and early next year. Such a move was supposed to strengthen the dollar, but not this time, as investors seemed cautious and reluctant to open new long positions on the dollar. Therefore, the agency expects any negative and unexpected news to weaken the dollar, while positive economic data is unlikely to boost the dollar, and the market is preparing for the end of the tightening cycle. But for now, the resilient job outlook and higher interest rate spreads in the U.S. are still positive for the dollar in the short term.

Zhu Yanhua, a foreign exchange expert from the international business department of a large bank, told reporters that compared with the high of 7.3 last year, China's economic growth rate has improved significantly, and the US dollar index has fallen sharply, and the reverse difference between Sino-US swap points has not increased significantly. Therefore, the previous price level of 7.25 was the result of excessive pessimism in anticipation. According to his model prediction, the balance of the US dollar index is temporarily below 100, while the dynamic balance of USD/CNY is temporarily between 7-7.1, which is very far from the current price of 7.2. From the experience of the past few years, mean reversion can be possible, but the timing is uncertain.