Offshore RMB weakens against the trend, with a record high decline in the central parity rate!

After the RMB/USD exchange rate broke the key threshold of 7 yuan last week and market appreciation expectations rose, the abnormal performance of the central parity rate on Monday was a cooling of the market - the RMB/USD central parity rate was adjusted to 6.9843 yuan, but it was 544 points weaker than the average predicted by Bloomberg's survey, which is the largest weakness since records began in 2018. This directly led to a weakening of offshore RMB trading, and after a slight rebound in onshore RMB opening, the volatility center still anchored the 6.95 weak side, significantly lagging behind the performance of the Asian currency during the same period, highlighting the intensified game between market expectations and policy guidance.

The background of the RMB's counter trend weakening this time is the significant pressure on the US dollar index, and the combination of multiple factors has led to a decrease in the attractiveness of the US dollar. Affected by the increasing risk of a US government shutdown, loose expectations of Federal Reserve policies, and geopolitical uncertainty, the US dollar index fell sharply overnight, hitting its largest single day decline in five months. The Asian market continued its downward trend at the beginning of the session, providing appreciation momentum for non US currencies. Against this backdrop, Asian currencies collectively strengthened, with the Korean won surging 1.4% against the US dollar to a new high in over two weeks, the Malaysian ringgit hitting a new high since 2018, and emerging market currency indices hitting historic highs, forming a general upward trend.

However, the Chinese yuan has deviated from this trend and become an "outlier" among Asian currencies. After the release of the central parity rate, the offshore RMB was the first to react, and the exchange rate fluctuated weakly; Although the onshore RMB opened slightly higher, it lacked sustained upward momentum and remained stable at a weak side of 6.95, failing to further expand its appreciation gains by taking advantage of the weakening of the US dollar. This differentiation trend breaks the previous linkage pattern of "weak US dollar and strong Chinese yuan", reflecting that policy regulation intentions are gradually hedging against spontaneous market fluctuations and avoiding unilateral exchange rate movements in the pricing of the Chinese yuan exchange rate.

The core of the abnormal trend of the RMB this time lies in the unexpected adjustment of the central parity rate, with a record breaking weakness of 544 points, which sends a clear signal of policy regulation. The central parity rate of the Chinese yuan is formed by weighting quotes from 14 market making banks, taking into account a basket of currencies, the closing price of the previous trading day, and the volatility filtering mechanism. It is not only the pricing benchmark for market exchange rates, but also an important carrier for the central bank to convey policy intentions. After the RMB rose above the 7 yuan mark last week, the market's expectation of unilateral appreciation quickly accumulated. This time, the central parity rate was significantly weaker than expected, essentially correcting the expectation of excessive appreciation.

From the perspective of pricing mechanism, the weak adjustment of the middle price is likely a combination of the "reference closing price" rule and policy regulation. After the rapid appreciation of the RMB last week, there may have been a hidden demand for a correction in the onshore market closing price. Market making banks combine this factor when quoting, and smooth out excessive appreciation momentum through a volatility filtering mechanism, ultimately forming a middle price significantly weaker than market expectations. This operation continues the recent policy of "following the trend but controlling the pace", which not only does not go against the market trend, but also suppresses the rapid appreciation of the exchange rate through the guidance of the middle price, avoiding the impact on the profits of export enterprises and cross-border capital flows.