Analysis Of Factors Affecting RMB Exchange Rate And Trading Decision

With the stability of China’s political situation, continuous enhancement of economic strength, the increasing perfection of the financial system and the gradual liberalization of the RMB exchange rate fluctuations, it has laid a solid foundation for the internationalization of the RMB. By expanding the scope of cross-border trade settlement pilot, signing a currency swap agreement between governments, setting up RMB clearing centers all over the world and the efforts to gradually open China’s capital projects, China finally won the approval of the International Monetary Fund (IMF) adding RMB into the SRD at the end of November in 2015, and will be formally implemented on October 1,2016. This is undoubtedly an important milestone for China’s economy into the world financial system.However, with the internationalization of Chinese currency, RMB exchange rate has become more flexible, the uncertainty of its trend and the difficulty of its forecasting have become more challenging. Therefore, the issue on RMB exchange rate has aroused the interests from all walks of life, and it is also a great challenge for banks’FX dealers. As we all know, there are many factors pushing the fluctuations of exchange rate, which promote exchange rate movement in a crisscross pattern. As bank FX dealers, we need to consider how to select and analyze these information data more effectively and make accurate trading decisions so as to avoid or reduce bank losses and earn more profit as we receive variety of market information data every day.This paper analyzes the factors that may cause the fluctuation of exchange rate in onshore interbank RMB spot and forward market by sampling the historical daily average data of 3,6month and 1 year in money market and foreign exchange marketin RMB and foreign currency and taking onshore interbank USD/CNY spot and forward exchange rates as the research objects. Wherein, the relationships between these factors and onshore RMB forward exchange rate will be studied by setting up an econometric model, which determines if there is a correlation, as well as the degree of correlation between the onshore RMB forward exchange rate and these factors. After the adoption of Chow test, FX dealers can use the regression model to predict the future price of RMB and its trend, then, make more reliable trading decisions.After descriptive analysis and empirical analysis, I found that RMB spot exchange rate mainly depends ontheproportion of buying and selling inFX spot market, market sentiment and the impact of fluctuations in non-dollar currencies, while RMB forward exchange rate is influenced by different variables according to the duration of the exchange rate. Therefore, FX dealers might make trading decisions by comparing the market price and the theoretical value measured by the model.If market forward quotation is higher than its theoretical value, it indicates that the market prices are overvalued, FX dealer may considered to sell dollar at market prices in advance, and buy it after its market price return to the theoretical value to make profit by then; If market forward quotation is lower than its theoretical value, it indicates that the market prices are undervalued, FX dealer may considered to buy dollar at market prices in advance, and sell it after its market price up to the theoretical value to make profit by then. According to the current model prediction, in the coming 10 months, the Yuan will continue to go down and the price will be locked at 6.80to the end of 2016.