Author:NI Shuhui XIAO Lisheng

Since March 24，2023，the renminbi (RMB) has depreciated against the US dollar，recording a drop of 5.74% by June 30. Simultaneously，the volatility in the US dollar's strong momentum was marked by two periods of decline from March 24 to April 26 and from May 31 to June 21，both of which coincided with the RMB’s depreciation. Typically，there is a strong negative correlation between the exchange rate of the RMB against the US dollar and the US dollar index. The concurrent depreciations of the two currencies suggest that even if the US dollar index declines，the RMB may still face considerable downward pressure. Based on the recent trends，we have identified that simultaneous depreciations of the RMB and the US dollar tend to occur during periods of misalignment in currency cycle transitions. This scenario is typically characterized by three facts，i.e. shrinking economic fundamentals of both China and the US，deficits in China’s foreign exchange settlement and sales，and narrowing interest rate differential between the two countries. It is important to note that this scenario is usually addressed through an improvement in economic fundamentals rather than an increase in the interest rate differential. The concurrent depreciations of the RMB and the US dollar since 2023 bears a resemblance to the situation observed in 2016. In future，the trajectory of the RMB will be influenced by changes in the US dollar index. Crucially，the principal determinant will be the recovery of China’s economic fundamentals. And the RMB is expected to rebound in the second half of 2023.

Review of Concurrent Depreciations of the RMB and the US Dollar

Through the recent trend of RMB depreciation，the two consecutive episodes of US dollar devaluation were relatively rare occurrences. It is thus essential to conduct a systematic review of the conditions under which the RMB and the US dollar simultaneously depreciated to identify how this scenario arose and how it was resolved. By examining the similarities and differences between the depreciating momentums of the two currencies，we can gain valuable insights into the future trajectory of the RMB.