Recently, the RMB exchange rate has weakened rapidly, but its relative performance is not poor compared with the currencies of other developed economies.

In the short term, the dollar index will be a key factor affecting the exchange rate of the RMB, and the RMB may continue to be under pressure.In the medium to long term, the dollar index may reach an inflection point after the second quarter, and the RMB may strengthen again as China's fundamentals stabilize.In addition, the central bank has plenty of policy toolboxes to deal with exchange rate fluctuations, if the dollar index continues to rise, and lead to continued accelerated devaluation of the RMB, or trigger policy-level regulation and control.

For financial markets,The reaction of the stock market to the depreciation of the RMB has been passivated, on the contrary, some of the export-oriented manufacturing industries under the logic of RMB depreciation may usher in potential opportunities, such as textile clothing, mechanical and electrical, automobile and light industrial manufacturing.In the bond market, the stage of the greatest pressure on foreign capital reduction has passed, and it is expected that the subsequent devaluation of RMB will have a relatively limited impact on the outflow of foreign capital from the bond market.

▍The relative performance of the renminbi is not poor.

This round of RMB devaluation shows the characteristics of "fast speed + large range + substantial widening of the offshore / onshore spread". Judging from the exchange rate of the local currency against the US dollar, compared with the performance of other developed economies, the depreciation of the RMB this round is actually relatively mild. Since the beginning of the year, the renminbi has depreciated by about 6.1 per cent against the US dollar, which is only weaker than the Canadian and Australian dollars, and its depreciation is also much lower than the currencies of developed economies such as the euro, sterling and yen. Looking at the exchange relationship between RMB and other mainstream currencies, the spot exchange rate of major currencies against RMB has gone up and down, and most of the currencies of RMB have not weakened. to some extent, this also shows that the recent weakness of the RMB is more due to the strengthening of the US dollar.

▍The policy toolbox of the central bank is rich, and the RMB may strengthen again after short-term pressure.

There are two main reasons for the continued depreciation of the RMB this round: first, the epidemic in some parts of the country has caused short-term disturbance to the domestic supply chain, the export growth rate has dropped under multiple pressures, and the domestic economic fundamentals are under pressure; second, the US dollar index has a strong performance. and through the "dollar index-basket of currency exchange rate-RMB midpoint-RMB spot exchange rate" transmission path will create passive depreciation pressure on the RMB.

In the follow-up, the short-term dollar index will be a key factor affecting the exchange rate of the RMB, and the RMB may continue to be under pressure. In the medium to long term, with the landing of accelerated Fed tightening and the gradual tightening of monetary policy in economies such as the European Union, the dollar index may reach an inflection point after the second quarter. With domestic fundamentals stabilizing, RMB depreciation is expected to slow down or turn foreign trade enterprises that "hold money and wait-and-see" into foreign exchange settlement, or support the RMB to strengthen again. The central bank has a rich policy toolbox in guiding foreign exchange expectations and dealing with exchange rate fluctuations, including but not limited to starting counter-cyclical factors and adjusting the foreign exchange deposit reserve ratio of financial institutions. If the dollar index continues to rise, the RMB will continue to depreciate at an accelerated rate, or trigger policy-level regulation.

▍What is the impact of RMB depreciation on the domestic economy and financial markets?

1) Macroeconomy: it is necessary to look at the impact of RMB depreciation neutrally. although devaluation may bring some pressure on capital outflows, it is also conducive to releasing export potential. With the continued depreciation of RMB, on the one hand, export enterprises are expected to obtain exchange gains; on the other hand, the depreciation of RMB has led to a decline in the prices of export products in the international market, and the competitiveness of enterprises in product prices has been improved. in order to make more profits to a certain extent.

2) stocks: the reaction of the market to the depreciation of RMB has been passivated in the short term, and some of the export-oriented manufacturing industries under the logic of RMB depreciation may usher in potential opportunities, such as textile clothing, mechanical and electrical, automobile, light industrial manufacturing and so on.

3) Bonds: the stage of the greatest pressure on foreign investors to reduce their holdings has passed, and it is expected that the subsequent devaluation of the RMB will have a relatively limited pressure on the outflow of funds from the bond market. Marginal improvement in domestic economic fundamentals and more structural instruments in monetary policy may make the yield of 10-year treasury bonds fluctuate in the short term. In the medium to long term, the domestic resumption of production will continue to advance, the supply chain will also be gradually repaired, wide credit "although late", it is expected that the follow-up will also gradually open, superimposed pig cycle for the pull of domestic CPI, 10-year treasury bond yields may gradually rise.

▍Risk factors:

The local epidemic situation in China is uncertain; the policy strength is not as strong as expected; the economic recovery is not as expected; and the Federal Reserve tightens more than expected.