FOREX REVIEW: a widening tension

The renminbi has strengthened against the US dollar over the past week despite increasingly clear signs that Beijing would prefer to limit further gains. Onshore USD/CNY ended Friday at 6.7113, up from 6.7267 a week earlier, meaning the RMB gained 0.23%. Offshore USD/CNH rose more sharply, from 6.7312 to 6.7080, a 0.34% RMB gain. The move has reflected broader dollar weakness during much of the week and China’s still-large trade surplus, although stronger-than-expected US employment data on Friday pushed US yields and the dollar higher. For China, continued RMB appreciation makes imports cheaper but risks squeezing exporters at a time when domestic demand remains weak.

The PBOC has consequently continued to restrain, rather than encourage, the RMB’s rise. Friday’s USD/CNY fixing was set at 6.7787, only slightly stronger than 6.7811 a week earlier and far weaker than the 6.7098 level markets had expected. The central bank has repeatedly set fixings weaker than market projections, while major state banks have bought dollars in the onshore market. The message is that Beijing wants currency stability: enough RMB strength to avoid appearing to engineer depreciation, but not enough to damage export competitiveness or employment.

Against other major currencies, movements have been mixed. The RMB has strengthened 0.33% against sterling, with GBP/CNY falling to 9.0753 from 9.1049, while EUR/CNY has been broadly unchanged at 7.7942 versus 7.7929. The yen has been the standout, rising 2.21% against the RMB as JPY/CNY climbed to 4.2954 per 100 yen from 4.2025, helped by expectations of tighter Bank of Japan policy. 

The week has therefore shown a widening tension between the forces supporting the RMB—China’s trade surplus and periods of dollar weakness—and policymakers’ reluctance to tolerate rapid appreciation while growth remains fragile. Banks have also raised dollar-deposit rates and increased Treasury purchases, helping absorb dollars that might otherwise be converted into RMB. This week, US inflation data and expectations for the Federal Reserve will be crucial: a stronger dollar could do some of Beijing’s stabilizing work for it, while renewed dollar weakness would test how firmly the PBOC is prepared to resist further RMB gains.