FOREX REVIEW: a gradual strengthening

The renminbi has strengthened for a seventh consecutive week against the US dollar, extending a gradual appreciation that increasingly looks compatible with Beijing’s preference for currency stability. USD/CNY ended Friday at 6.7417, down from 6.7476 a week earlier virtually unchanged. The main support has come from fading expectations of a September Federal Reserve rate increase, which have weakened the dollar, alongside increasingly strong PBOC fixings. For China, moderate appreciation helps contain imported inflation and signals confidence in financial stability, although excessive gains would make Chinese exports more expensive abroad.

The PBOC has continued to move its daily fixings toward a stronger RMB, setting USD/CNY at 6.7878 on Friday, its strongest fixing since February 2023. However, that was still around 465 points weaker for the RMB than the market-derived Reuters estimate of 6.7413. Earlier fixings showed the same pattern, moving from 6.7900 on Tuesday to 6.7882 on Wednesday and 6.7888 on Thursday. The combination suggests the central bank has been willing to accommodate gradual RMB appreciation while preventing the currency from strengthening as quickly as market forces might otherwise dictate.

That balancing act has become more important as domestic conditions have weakened. July bank lending contracted by a record RMB 340 billion, while the PBOC has reiterated that monetary policy will remain moderately loose and that additional support can be introduced when necessary. A sharply stronger RMB could complicate that easing stance by adding pressure to an export sector that remains one of the economy’s stronger growth engines.

The RMB’s gains have been less uniform elsewhere. One euro was worth RMB 7.7977 on August 14, compared with 7.7834 a week earlier, meaning the RMB weakened about 0.18% against the euro. The euro has been supported by expectations that the European Central Bank will raise rates again in September as energy-driven inflation remains above target.

The week has therefore reinforced a relatively controlled RMB appreciation rather than a broad currency surge. With Chinese credit demand weak and the PBOC simultaneously promising economic support and exchange-rate stability, investors are watching whether upcoming policy decisions can support domestic growth without reversing the yuan’s recent gains.