Ouyang Xiaohong/Text

What's going on? The framework that used to focus on the US dollar index and interest rate spread to see how the RMB exchange rate went seems to be malfunctioning. The RMB continues to strengthen, should we buy some US dollars now? "Investors who are concerned about macro finance and the market have been feeling a bit confused recently.

At 16:30 on October 9, 2026, the onshore RMB/USD spot exchange rate closed at 6.6921, an increase of 93 basis points from the previous trading day, reaching a new high since June 29, 2022; On that day, the central parity rate of the Chinese yuan against the US dollar was 6.7330, up 37 basis points. On the same day, the US dollar index closed at 102.21, an increase of nearly 4% for the year.

The special feature of this round of market trend is that the Chinese yuan and the US dollar have strengthened synchronously. Cheng Shi, Chief Economist of ICBC International, stated that it is not common for both to strengthen simultaneously since the exchange rate reform in 2015. As of September 24th, the yield spread between 10-year US Treasury bonds and Chinese Treasury bonds has widened by 117 basis points during the year, while the RMB exchange rate against the US dollar has still appreciated by 4.1%. He believes that domestic foreign exchange settlement is an important direct driving force for the appreciation of the RMB in this round.

On October 8th, the People's Bank of China released its stance on the RMB exchange rate policy, clarifying that market supply and demand play a decisive role in the formation of the RMB exchange rate. The People's Bank of China does not preset exchange rate target levels, does not intervene in long-term exchange rate trends, and maintains exchange rate flexibility and two-way floating.

The People's Bank of China pointed out that since 2025, the cumulative appreciation of the RMB against the US dollar has been about 9%. Looking ahead, there are various factors that affect the RMB exchange rate, including both appreciation and depreciation drivers, and the direction of the exchange rate remains uncertain.

The interest rate spread has not disappeared, but the market has turned. If there is a "new anchor" for the exchange rate, its more accurate meaning is that the forces and weights that affect prices are changing at different stages. In the future, when looking at the Chinese yuan, besides the US dollar and interest rate differentials, what other variables should we consider?

Beyond the interest rate spread

This time, the logic of the exchange rate following the interest rate has changed.

Since 2026, the US dollar index and US bond yields have risen rapidly, putting pressure on non US currencies, and the overall appreciation trend of the RMB against the US dollar continues.

The difference since the beginning of this year is that the Chinese yuan has not only appreciated against the US dollar, but also against a basket of currencies. Last year, the exchange rate of the Chinese yuan appreciated by about 4% against the US dollar, but depreciated by about 9% against the euro. At the end of the year, exchanging 10000 euros would cost about 7000 yuan more than at the beginning of the year; At the same time, the US dollar index fell by about 9% throughout the year.

According to data from the China Foreign Exchange Trading System (CFETS), on September 30th, the CFETS RMB exchange rate index was 103.20, the Bank for International Settlements (BIS) currency basket index was 110.61, and the Special Drawing Rights (SDR) currency basket index was 98.06, up 0.27, 0.33, and 0.27 basis points respectively from the previous trading week.

This is almost a market that doesn't play according to textbooks: in 2026, the nominal interest rate spread between China and the United States for the 10-year period widened to over 300 basis points, and according to the classic inference of unaddressed interest rate parity (UIP), the renminbi should be under pressure - but in reality, it is not. Keynes' discussion of carryover interest rate parity (CIP) in "Monetary Reform Theory" precisely reveals this difference: under ideal arbitrage conditions, the interest advantage will be completely offset by forward premiums. In other words, the spread pricing is based on forward exchange rates rather than spot exchange rates, so 'if US interest rates are high, the renminbi should depreciate' is a simplified inference that skips the forward market.

However, in the past, when observing the exchange rate of the Chinese yuan, the market assumed a linear chain: strong US dollar index → weak Chinese yuan; The widening interest rate differential between China and the United States → capital flows to the US dollar → depreciation of the Chinese yuan. But since 2025, the explanatory power of this single factor framework of "USD+spread" has declined.

The 'dual strength' of the Chinese yuan and the US dollar is actually not contradictory. The US dollar index measures the performance of the US dollar against a group of currencies such as the euro and yen. The strengthening of the US dollar against this group of currencies and the weakening of the Chinese yuan can be established in terms of parity, although it is not common.

Although the theory is like this, when applied to the real decision-making of cross-border investment, the logic is more direct: why did higher US dollar interest rates not affect the appreciation of the Chinese yuan? The answer lies in the calculation of total return. The excess interest earned on US dollar assets may be offset by exchange losses when converted back into RMB; If the foreign exchange is locked in advance, it should be included in the hedging cost. The annualized spread and exchange rate fluctuations must be compared within the same holding period. When not locked in, investors bear the uncertainty of future exchange prices. What often affects today's exchange rate is the change in the future interest rate path relative to the original expectations.

MIT economist Rudig Dornbush's 1976 exchange rate overshoot model further explains that asset prices adjust faster than commodity prices, and exchange rates may first cross long-term equilibrium positions before gradually returning.

Cheng Shi attributed the dual strength of the Chinese yuan and the US dollar in this round to different driving forces: the US real interest rate supported the US dollar, while domestic exchange settlement supported the Chinese yuan. He found that since 2025, the relationship between the RMB exchange rate and the 10-year interest rate differential between China and the United States in the models used is no longer significant. Based on this, Cheng Shi believes that the explanatory power of the model has changed at this stage, but it cannot be concluded that the spread framework has permanently expired. The 10-year treasury bond interest margin still has reference value, but the deposit and loan interest margin, forward quotation and financing cost that enterprises actually face also need to enter the field of vision.

Guan Tao, Chief Economist of Huafu Securities, believes that this round of RMB rebound is the result of China's strong exports, trade surplus on the fundamentals of foreign exchange supply and demand, and the market confidence boosted by the new and better development of the economy.

Where does the new anchor land

To some extent, the dual strength of the Chinese yuan and the US dollar in this round may be a sign of the transfer of pricing power of the Chinese yuan from "offshore financial markets" to "domestic industrial markets". The old anchor (pegging to the US dollar index and interest rate spread) is fading, and the new anchor - trade settlement, industrial competitiveness, asset allocation, and RMB internationalization - has become the underlying support for the exchange rate.

If the interest rate spread framework needs to be re evaluated temporarily, the linear correspondence between the current account and the exchange rate also needs to be re evaluated.

The People's Bank of China stated that there is no linear relationship between the current account and the exchange rate. Exchange rate is a comparative relationship between currencies, influenced by multiple factors such as economic growth, monetary policy, financial markets, geopolitics, and sudden risk events. Analyzing exchange rate fluctuations requires not only examining goods trade, but also services trade; Not only should we look at the current account, but also the financial account; We should not only focus on economic fundamentals, but also on expectations and other factors.

The People's Bank of China pointed out that using the International Monetary Fund's (IMF) External Balance Assessment (EBA) results as the basis for undervaluing the RMB exchange rate is a misinterpretation and misuse of the assessment results, and a lack of necessary professional understanding of the exchange rate.

The closest observation to the spot market is whether foreign exchange earnings are truly converted into RMB demand - it depends on the surplus of foreign exchange settlement and sales, as well as the exchange rate. As analyzed by CITIC Securities, the dominant factor of the RMB is shifting from interest rate differentials back to trade, and the nature of this round of appreciation is a shift in pricing weights rather than an undervalued repair.

According to data from the State Administration of Foreign Exchange, in August, banks' foreign-related income from clients amounted to 776.8 billion US dollars, external payments amounted to 714.4 billion US dollars, and a net inflow of 62.4 billion US dollars; The bank settled 251.8 billion US dollars in foreign exchange and sold 203.3 billion US dollars in foreign exchange, resulting in a surplus of 48.5 billion US dollars in foreign exchange settlement and sales.

The former records cross-border receipts and payments, while the latter records currency exchange. The statistical scope and time point are different, and it is not possible to simply subtract the two trade surpluses to calculate the size of the US dollar that has not yet been settled. Enterprises can receive export payments and settle them to pay wages, or leave them for import, debt repayment, or overseas investment. Enterprises that have already locked in foreign exchange before may only perform old contracts when receiving payments. Whether a trade surplus can drive immediate appreciation depends on the use of funds and exchange options.

Cheng Shi believes that the exchange losses caused by the appreciation of the RMB have weakened the foreign exchange earnings and driven enterprises to increase their foreign exchange settlements. This mechanism may also be self reinforcing: the strengthening of the RMB increases the cost of waiting for foreign exchange settlement, and the addition of foreign exchange settlement supports the strengthening of the RMB.

However, this feedback mechanism is not unidirectional. Once the expectation of appreciation weakens or the return on US dollar holdings improves, companies may also slow down their exchange rate.

Therefore, the settlement amount and settlement rate must be considered together. According to Li Bin, Deputy Director and spokesperson of the State Administration of Foreign Exchange, the foreign exchange settlement rate of enterprises in August was 61.5%, 2.7 percentage points lower than the average level of the first seven months of this year. The willingness of enterprises to settle and hold foreign exchange is relatively stable, and market expectations are overall stable.

Looking further out is a basket of exchange rates. The rise of the CFETS RMB exchange rate index reflects the overall strength of the RMB relative to the basket, but the basket itself is not an independent buying market.

The actual effective exchange rate also needs to take into account the relative prices at home and abroad. When the price increase in China is lower than that of its trading partners, the actual appreciation may be smaller than the nominal appreciation. The exchange rate of RMB against the US dollar has reached a new high, and it still has price competitiveness with some export enterprises, which can coexist.

A deeper observation is whether income can be sustained and which assets funds are willing to allocate. We need to consider industry revenue, as well as local currency settlement, hedging, and cross-border allocation, with the background of internationalization and currency system reconstruction. Export orders and industrial competitiveness affect the sustainability of income. The People's Bank of China pointed out that foreign trade enterprises are using more exchange rate hedging methods, with about 30% of trade settled in RMB, and the proportion of foreign exchange hedging for enterprises has also reached about 30%, further reducing the sensitivity of trade to exchange rate fluctuations. Similarly, a larger trade surplus can accompany enterprises and residents to increase their overseas asset allocation.

In short, look at exchange and position in the short term, income and expenditure and asset allocation in the medium term, and productivity and relative purchasing power in the long term.

At the same time, market prices also face a question: when is a normal adjustment and when will it backfire on the market?

The People's Bank of China reiterates that China implements a managed floating exchange rate system based on market supply and demand, adjusted with reference to a basket of currencies. While insisting on allowing the market to play a decisive role in the formation of exchange rates, the focus is on preventing short-term significant fluctuations in exchange rates, especially short-term sharp depreciation, from affecting financial stability. The People's Bank of China uses macro prudential management tools to regulate and guide expectations in specific scenarios, such as the outbreak of the epidemic and major external shocks such as the April 2025 tariff war, and even directly intervenes in foreign exchange in extreme situations to correct the market's "herd effect" and self reinforcing irrational expectations, especially irrational depreciation expectations, and prevent short-term destructive overshoots of the exchange rate.

Guan Tao stated that the RMB is facing a conflict between internal and external balance: a surplus in foreign trade and a high supply of foreign exchange provide support, while strong domestic supply and weak demand, as well as negative interest rate differentials between domestic and foreign markets, create pressure.

For individuals and businesses, the US dollar quotation is cheaper, but it is still not enough to answer alone when to exchange currency. What currency will be used for future expenditures, when will it be used, and how much fluctuation costs are willing to bear, will also be included in the bill.

The anchor of exchange rate will ultimately be tested by bidirectional fluctuations.

(Author Ouyang Xiaohong)