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The macro driving factors of co-movement of RMB with other currencies in FX markets

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  • Dai, Yixin
  • Yu, Cong
  • Xu, Xiangyun
  • Zhou, Jindie
  • Teng, Fengfan

Abstract

The co-movement of the RMB exchange rate with other currencies highlights the global standing of the RMB and its significance in FX markets. This paper employs the rational expectations present-value model of exchange rates to identify the macroeconomic factors influencing this co-movement. Our finding reveals a general increase in the RMB's co-movement with other currencies, especially after the 2015 reform of the RMB exchange rate regime, known as the “811 Reform”. Factors such as the synchronizations of output and monetary policy, as well as global market sentiment significantly, can affect this co-movement significantly. However, this explanatory power is relatively weaker compared to trade linkage. The market-oriented reforms in the RMB exchange rate regime and the liberalization of capital account in China have indeed strengthened this co-movement. Additionally, various international cooperation policies taken by the Chinese government have demonstrated promotional effects. This study echoes the traditional exchange rate determination theory and offers some policy implications for the internationalization of the RMB.

Suggested Citation

  • Dai, Yixin & Yu, Cong & Xu, Xiangyun & Zhou, Jindie & Teng, Fengfan, 2024. "The macro driving factors of co-movement of RMB with other currencies in FX markets," International Review of Financial Analysis, Elsevier, vol. 96(PA).
  • Handle: RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005131
    DOI: 10.1016/j.irfa.2024.103581
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    More about this item

    Keywords

    Exchange rate co-movement; Macro driving factors; RMB internationalization;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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