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

• Published in: International review of financial analysis Vol. 96; p. 103581
• Main Authors: Dai, Yixin, Yu, Cong, Xu, Xiangyun, Zhou, Jindie, Teng, Fengfan
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01-11-2024
• Subjects: Exchange rate co-movement; Macro driving factors; RMB internationalization; G12; G15; RMB internationalization; Exchange rate co-movement; F31; Macro driving factors
• ISSN: 1057-5219
• DOI: 10.1016/j.irfa.2024.103581

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.
•We focus on the co-movement of the RMB exchange rate with other currencies.•We employ a simple framework to identify the macroeconomic factors influencing this co-movement.•Selected synchronizations of observable fundamentals and common external shocks have significant effects on the co-movement.•Reforms in the RMB exchange rate regime and the liberalization of capital account in China strengthen such co-movement.