In recent days, the exchange rate of the Chinese yuan against the US dollar has been on a downward trend, and it has now broken through the 6.88 mark.

On February 2nd, the offshore exchange rate of the yuan against the US dollar reached a peak of 6.7059, very close to breaking through 6.70. However, it was unexpected that it did not break through 6.70 at that time, but instead initiated this wave of decline.

So far, the maximum decline has been close to 1800 points. This is also the largest wave of devaluation of the yuan since December last year.

What is the reason for this wave of decline? Will it continue to fall, breaking through 7.0 again? Will the trend of continuous inflow of foreign capital be interrupted?

Let's look at some relevant facts to understand.

01, a sharp drop of 1800 points

Since the yuan has shown a clear appreciation, it has been advancing rapidly, breaking through several integer levels, and some people even believe that the yuan will continue to rise and break through 6.5.

However, the trend of any investment cannot always rise or fall unilaterally, so the current round of devaluation should not be overly concerned.

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Although it has dropped 1800 points from 6.70 to the current 6.88, it is not the first time in this wave of appreciation. On November 15 last year, the yuan reached its highest level of 7.02, and by November 28, the yuan fell to its lowest level of 7.26. At that time, the decline of the yuan was even greater, reaching 2400 points within a few days. However, it was followed by a wave of appreciation, and the yuan exchange rate broke through the 7.0 mark.

The possibility of two-way fluctuations in the future exchange rate is relatively large, but the overall trend is still the continuous appreciation of the yuan, and the downward trend of the US dollar is temporarily difficult to change.Moreover, when we look at a slightly longer period, there is no need to worry about the Chinese yuan. Since the beginning of 2023, the US Dollar Index has risen by 0.78%, but the US dollar has depreciated against the Chinese yuan by 0.53%, which fully demonstrates that the Chinese yuan is strengthening against the trend.

02, Reasons for the Decline

The recent re-emergence of the Chinese yuan's decline is related to the high accumulation of past gains, as well as to the resurgence of inflation data in the United States.

As the global market believes that inflation in the United States is under control and is slowly falling, it is predicted that the Federal Reserve will stop raising interest rates in the future. However, the latest inflation data showed that US prices have shown a trend of rebounding, leading to a reversal of market expectations. The Federal Reserve may even raise interest rates by 50 basis points in March. Under these circumstances, the US Dollar Index has strengthened again, leading to the decline of other non-US currencies.

For example, the Japanese yen, which was previously at a high of 127.22, has now fallen to 134.57; the euro has also fallen from 1.10 at the beginning of February to the current 1.065. Therefore, it is quite normal for the Chinese yuan to experience a certain decline.

03, Capital Flows

Exchange rate fluctuations can be influenced by some short-term factors, but the long-term trend is ultimately determined by economic strength.

It is clear that the United States is still affected by inflation, which is very damaging to the economy.

For ordinary people, this means increased prices and reduced real disposable income, leading to decreased consumption and subsequently affecting business operations.

At the same time, increased loan expenditures further squeeze the consumption expenditures of ordinary people, and may even lead to the sale of houses, which will affect the entire real estate market.For businesses, an increase in interest rates leads to higher financing costs, which is one aspect that reduces profits. Operational costs such as logistics, warehousing, labor, and rent also increase with the rise in prices, which is another aspect that reduces corporate profits.

For listed companies, an improvement in the market interest rate environment can cause a decline in stock valuation, leading to a drop in stock prices.

China's economy is just the opposite, with a low inflation and low interest rate environment that is very conducive to economic recovery.

Therefore, this year, the continuous inflow of foreign capital has significantly expanded, and there is no need for us to worry about the outflow of foreign capital.

Even though the Chinese yuan depreciated to a certain extent in February, overall, the flow of northbound capital remains balanced, which fully reflects that foreign capital's rush to buy Chinese assets will not stop.

Wall Street investment banks believe that the inflow of capital into A-shares for the whole year is expected to exceed 500 billion yuan.