ECGlcd foreign exchange situation: China says stabilizing foreign exchange market is top priority

 China's central bank said on Wednesday that stabilizing foreign exchange markets was a top priority now that the yuan has depreciated to its lowest level since the 2008 global financial crisis.

The remarks from the People's Bank of China (PBOC) came as the tightly managed yuan continued to weaken against the dollar, down 0.9% on the day and more than 12% so far this year, as the yuan hit a record low in offshore trades.

The People's Bank of China said the foreign exchange market was operating in an orderly manner, but warned against making large one-way bets on the currency. Reiterates that the RMB has a solid foundation of fundamental stability.

"The foreign exchange market is important, and maintaining stability is the top priority," the People's Bank of China stressed.

As an investor, do you know what are the reasons for foreign exchange fluctuations? ECG has made a summary:

Inflation

The inflation rate represents the purchasing power of a country’s currency. The currencies of low-inflation countries usually represent high purchasing power and have a higher value than the currencies of other countries. The inflation rate is closely related to a country’s fiscal and interest rate policies.

interest rate

A country's benchmark interest rate is the key to the money supply. Lowering the interest rate means that the central bank hopes to release more money into the market, thus increasing the money supply and making the currency easy to depreciate. An increase in interest rates, on the other hand, takes back excess money flows in the market, resulting in a reduction in supply. When interest rates are raised, it is easy to attract foreign investment, resulting in increased demand and currency appreciation.

Natural and man-made disasters (including politics)

The foreign exchange market, like the stock market, is not only affected by policies and economic indicators, but also turbulent due to natural and man-made disasters. For example, if a coup occurs in a country, the stock and foreign exchange markets often collapse together. For example, the Japanese yen is usually regarded as a A safe-haven currency, the yen has often seen appreciation in the past when emerging countries have experienced turmoil.

Other popular safe-haven currencies include the U.S. dollar, Swiss franc, and euro.

Transaction volume (demand/supply)

Trading volume is usually an indicator that short-term foreign exchange investors will pay close attention to. If the demand for a currency increases greatly, there is a possibility of appreciation.

Economic performance of countries

The economic performance of each country affects the currency exchange rate trend of the country, and countries with relatively stable economic growth also have relatively stable exchange rate trends, due to the stable market demand for their currencies, such as the US dollar and the Japanese yen, which are often regarded by the market as safe-haven commodities; Countries that experience drastic political and economic changes often experience large sales of their currencies and high inflation.

For countries that rely on the import and export of raw materials or commodities, their exchange rates are affected by the price fluctuations of the commodities, such as copper and iron ore. Countries that rely on commodity exports also dampen exchange rate growth to boost exports.

country's fiscal policy

The central bank of each country will stabilize the country's economic development and price index by adjusting its fiscal and monetary policies. In addition to the exchange rate being correlated with interest rates and inflation rates, a country's bond purchase policy and bond market will also affect the exchange rate trend of the country's currency.

The yield rate of short-term government bonds can be regarded as a leading indicator of exchange rate changes. When the price of short-term bonds falls and the yield rate rises, it is easy to attract foreign investors and form support for the country's currency.

In addition, when the monetary and fiscal policies of the United States are tightened - raising interest rates and reducing the scale of bond purchases, the appreciation of the dollar is likely to lead to the depreciation of the currencies of emerging countries, resulting in the expansion of external debts of emerging countries.

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