- The onshore Chinese yuan (USDCNY) spot exchange rate closed at a nearly three-and-a-half-year high on Friday, at 6.7616, with a single-day increase of 0.23%. Meanwhile, the yuan's central parity rate against the dollar also reached a three-and-a-half-year high at 6.8109, reflecting market optimism about easing geopolitical tensions.
- Boosted by the positive outlook for a potential peace agreement between the United States and Iran, global market risk appetite has significantly rebounded. The US dollar index (DXY) fell below the 100 mark during the day, providing external support for the yuan's rebound and continued moderate appreciation.
- Although the US Producer Price Index (PPI) for May recorded a month-on-month increase of 1.1%, the largest year-on-year increase in three and a half years, the market reaction was relatively short-lived. Investors' expectations for the Federal Reserve's (Fed) next rate hike have shifted back to December, with CME rate futures pricing showing a 63.3% probability of a rate hike in October.
Stable Policy Control and Marginal Release of Central Parity Rate
A foreign exchange trader at a Chinese commercial bank pointed out that from today's setting of the yuan's central parity rate against the dollar, the People's Bank of China tends to allow the yuan to appreciate in a measured manner under the current environment, while also preventing the exchange rate from rising too quickly to maintain market stability. Notably, today's actual central parity rate was set about 470 basis points weaker than Reuters' forecast, reflecting the regulators' cautious attitude in guiding the yuan's moderate appreciation. If external uncertainties increase in the future, the adjustment strength of the counter-cyclical factor in the central parity rate may be further adjusted.
Geopolitical Easing Drives Risk Asset Rebound
The latest developments on the geopolitical front have become the main driving force behind today's fluctuations in the global foreign exchange market. According to Iran's Mehr News Agency, the draft memorandum of understanding between the US and Iran includes key terms such as the US commitment to lift multiple sanctions, withdraw troops from around Iran, and reopen the Strait of Hormuz. Although the draft still requires final approval from the decision-making bodies of the relevant parties, and some Asian traders remain cautious about the swift conclusion of the agreement, this potential positive news has significantly improved cross-border capital risk appetite, prompting some safe-haven funds to flow out of the dollar, thereby providing broad support for non-US currencies.
Macro Inflation Data and Fed Policy Tone
On the macro data front, the US PPI data for May released overnight exceeded the market's general expectation of 0.7% and reached 1.1%, showing the stubbornness of underlying inflation pressures in the US. However, the impact of this strong data on the global foreign exchange market did not last. The latest analysis report from the financial markets department of China Merchants Bank suggests that although the Fed lacks the urgency for consecutive rate hikes in the short term, due to the resilience of core inflation and the labor market, the monetary authorities are expected to maintain a hawkish policy stance. If geopolitical situations and inflation trends reverse again in the future, the major currency trends may face the possibility of repricing.
Cross-Border Capital Flows and Market Outlook
From the perspective of market trading activity, as of today's close, the onshore market's spot trading volume reached $33.981 billion, indicating that the trading willingness of cross-border funds remains high as the yuan hits a new high. Meanwhile, the offshore yuan (USDCNH) spot exchange rate was reported at 6.7605, and the one-year US dollar to yuan swap points were reported at negative 1697 points. Regarding the subsequent evolution of the US dollar index, mainstream market analysis expects that in the short term, the DXY may maintain a volatile pattern within the range of 98 to 100.60. If the dollar index forms strong resistance near the 100 mark, the yuan exchange rate is expected to continue its stable upward trend.
