(Yicai) July 26 -- The offshore Chinese yuan has strengthened against the US dollar, mainly because of the increased volatility in the foreign exchange market.

The spot exchange rate of the offshore Chinese yuan versus the US dollar was 7.2604 as of 5.00 p.m. Beijing time today, with the lowest for the day being 7.2327. The rate plunged to as much as 7.2020 yesterday.

Meanwhile, the spot exchange rate of the onshore Chinese yuan versus the US dollar was 7.2517 as of 5.00 p.m. today, after earlier falling as much as 7.2336. Yesterday, the rate sank to 7.2080 intraday.

Carry trade usually prevails offshore, as market participants short low-interest currencies, including the Chinese yuan, Japanese yen, and Swiss franc, and long high-interest currencies, such as the US dollar, to profit from interest rate and exchange rate differentials, a foreign exchange trader at an overseas bank told Yicai.

However, market participants have recently adopted opposite market strategies, the trader noted. “There was a prevalence of short-selling, which led to a sharp appreciation of the Chinese yuan.”

The US is facing too many political uncertainties after Donald Trump’s assassination attempt and Joe Biden’s withdrawal from the election race, according to market participants. These events caused the foreign exchange market to become increasingly volatile, the financial leverage to narrow, and trading positions to shrink.

The three major indexes in the US suffered heavy losses in the past three days. The Nasdaq Composite Index, S&P 500 Index, and Dow Jones Industrial Average plunged 4.6 percent, 3 percent, and 1.2 percent, respectively, between July 23 and yesterday.

Fluctuations in the foreign exchange market are expected to intensify in the coming weeks, as the US Federal Reserve and the Bank of Japan are about to announce their interest rate decisions. Some market insiders believe the Fed will cut interest rates and the BOJ will raise them. Moreover, global tech giants, such as Amazon, Apple, Meta, and Microsoft, will release their earnings reports.

With the strengthening of the offshore Chinese yuan against the US dollar, foreign trade firms have begun settling their foreign exchanges because they are afraid the yuan will keep appreciating and will lose money, traders told Yicai. Before, most exporters were waiting for the right moment to convert US dollars into Chinese yuan to get the highest gains.

The flexibility of the Chinese yuan may improve in the second half of the year, which will help narrow carry trade, said Li Xiaoming, foreign exchange trader at the financial market department of Bank of Communications.

Meanwhile, the gap between the Central Parity Rate released by Chinese central bank and the spot exchange rate is expected to narrow, Li noted. the Central Parity Rate has gradually weaken to the low in seven and half months, demonstrating that regulators are steadily releasing pressure to further adjust the market, he added.

Editor: Futura Costaglione