In November, the Bank of China's foreign exchange market trading was stable, with the overall market average daily trading volume slightly declining compared to the previous period.

Recently, the China Foreign Exchange Trading Center Market Department released the "November 2024 Interbank Foreign Exchange Market Operation Report." It pointed out that in November 2024, the interbank foreign exchange market trading was stable, with a slight decrease in average daily trading volume across the market; the overall demand for foreign exchange purchases in the market was stable, and there was no panic buying in line with the economic cycle; the domestic and foreign option volatility fluctuated widely due to the impact of the US elections; the domestic long-term forward exchange points slightly decreased, widening the difference with interest rate parity; and the foreign currency interest rate market's overall US dollar liquidity remained stable. I. Interbank foreign exchange market trading was stable with a slight decrease in average daily trading volume across the market. The average daily trading volume in the interbank foreign exchange market in November was $196.502 billion, a year-on-year increase of 14.97% but a month-on-month decrease of 4.52%. The average daily trading volume for the RMB foreign exchange market was $154.104 billion, a year-on-year increase of 23.48% but a month-on-month decrease of 4.75%. The average daily trading volume for foreign currency pairs was $8.977 billion, a year-on-year decrease of 0.77% but a month-on-month increase of 16.10%. The average daily trading volume in the foreign currency interest rate market was $33.421 billion, a year-on-year decrease of 9.85% and a month-on-month decrease of 7.88%. II. The US dollar strengthened, while the RMB slightly strengthened against a basket of currencies. As Trump was elected US president, expectations of a US interest rate cut cooled, and the US dollar index rose strongly, reaching a nearly two-year high during the month. In November, the US dollar index strengthened and surpassed the 108-point mark. Firstly, Trump won the US election this month. On the one hand, worries about long-term inflation and expanding fiscal deficits in the US increased, leading to a sharp rise in US bond yields; on the other hand, Trump frequently threatened to impose tariffs, weakening non-US currencies. In addition, US economic data, such as PMI, was positive, dampening expectations of a US interest rate cut, which also supported the US dollar. At the end of the month, the US dollar index significantly fell. Market expectations that the next Treasury Secretary would ease tariff threats and prioritize fiscal discipline, as well as concerns that the US dollar index had risen too much without fundamental support, led to profit-taking by dollar bulls at high levels, combined with expectations of a rate hike by the yen, causing the US dollar index to fall below 106 points. At the end of the month, the US dollar index closed at 105.737, appreciating by 1.69% for the month. The RMB slightly strengthened against a basket of currencies. In November, the RMB remained strong against most non-US currencies, with the CFETS RMB exchange rate index rising by 0.31%. III. The overall demand for foreign exchange purchases in the market was stable, and panic buying in line with the economic cycle did not occur. The market demand for buying foreign exchange was concentrated in the first half of the month and significantly decreased in the second half. Looking at the initiating transactions for spot trades, during the first half of November when the RMB exchange rate was depreciating, the market demand for buying foreign exchange increased significantly, with a net daily buying of $324 million; in the second half of the month when the exchange rate stabilized, the net daily buying decreased to $70 million, roughly in line with October. The net daily buying of foreign exchange for the month was $203 million, a slight increase of $132 million compared to October. In terms of trading behavior, there were no obvious herd trading characteristics in the market, with a market flocking effect index of 61.85 in November, a slight increase of 0.29 points compared to the previous month, still below the historical average level of 62.71 points in the past year. IV. The volatility of domestic and foreign options fluctuated widely due to the impact of the US election, and short-term depreciation expectations cooled. In November, market sentiment was influenced by the US election, leading to significant volatility in option volatility, with some short-term parity options' implied volatility jumping and hitting new highs for the year. The RR volatility for 1M 25D options overall slightly decreased, reflecting a slight cooling of market expectations for the short-term depreciation of the RMB. In the onshore market, the implied volatility of the USDCNY 1W ATM options jumped to over 9.9% at the beginning of the month, hitting a near two-year high, before gradually falling to 3.45% at the end of the month. The implied volatility of the 1M 25D RR options steadily decreased at the beginning of the month, with a slight rebound in the middle of the month before falling again to -0.35% at the end of the month. In the offshore market, option market volatility was even more pronounced. The implied volatility of the USDCNH 1W ATM options spiked to over 16% at the beginning of the month, reaching a new high for nearly a decade; the 1M 25D RR options fluctuated downward throughout the month, reaching a low point for nearly two months. V. The long-term forward exchange points in the domestic market slightly decreased, widening the difference with interest rate parity, while the offshore foreign exchange forward points moved against the trend, leading to a continuous expansion of the difference between domestic and foreign forward points. In November, the overall fluctuation of the domestic RMB foreign exchange forward points was small, with a slight decrease in long-term points. At the end of the month, the 1Y forward points were at -2193 basis points, a slight decrease of 62 basis points compared to the end of the previous month. The long-term forward points remained below the theoretical value of interest rate parity, with the difference continuing to widen, with the 1Y forward spread widening to -300 basis points, a new low in nearly three months. Tightening liquidity in offshore RMB markets drove up offshore foreign exchange forward points, deviating from the trend in the onshore market, leading to a widening difference between domestic and foreign forward points. In November, offshore RMB liquidity was noticeably tight, with the offshore RMB overnight HIBOR surpassing 6% in the middle of the month, hitting a new high in nearly six months, and the CNH HIBOR curve moving upwards overall. As a result, the onshore-offshore US interest rate spread narrowed slightly and led to a rise in offshore forward points, with the difference between domestic and foreign forward points continuously widening. At the end of the month, the difference in 1Y forward points between domestic and foreign currencies widened to -950 basis points, a new low in nearly three months. VI. The overall US dollar liquidity in the foreign currency interest rate market remained stable, with a narrow fluctuation in the spread between domestic and foreign interest rates, and a decline in net positions for major borrowing parties. There was a slight differentiation in the US dollar interest rate levels domestically and abroad, with foreign rates fluctuating while domestic rates remained stable. In the foreign market, the Federal Reserve announced a 25 basis point cut to the Federal Funds rate target range on November 8, leading to a 22 basis point decrease in the SOFR rate to 4.60% on that day, followed by fluctuations in the 4.56% to 4.60% range. In the domestic market, affected by the Fed's rate cut, the weighted average transaction rates for various tenors of domestic US dollar borrowings fell, with overnight rates stable around 4.84% before the rate cut, stabilizing at 4.61% on the day of the cut and at 4.60% for the rest of the time. The spread between domestic and foreign overnight US dollar rates was mainly affected by changes in the SOFR rate, showing a narrow fluctuation. Influenced by a spike in SOFR at the beginning of the month, the spread was -2 basis points, turning positive later and narrowing to 0 basis points on the day of the rate cut, fluctuating at a low level of below 4 basis points for the rest of the month. The overall sentiment index for US dollar borrowing funds remained low, with a slight fluctuation.The emotional index was around 40 points before the interest rate cut, and slightly increased to around 47 points after the cut, fluctuating narrowly. It closed at 46 points at the end of the month, up 5 points from the previous month.The decrease in the amount of US dollars placed in overseas branches did not result in systemic liquidity tightness in the market. The trading volume in the foreign currency interest rate market decreased in November, mainly due to the impact of two US holidays during the month and lower trading volume at the end of the month. Additionally, there was a significant decline in the lending volume of major market participants. In terms of lending direction, the main flow of US dollars in the market still mainly comes from Chinese large banks lending to their overseas branches, while the net positions of various types of institutions remain unchanged. Considering both price and volume factors, there was no systemic liquidity tightness in the market. Looking at the overall market, domestic large banks, as the main providers of liquidity in the lending market, did not show a significant decrease in the amount of US dollars lent to other types of institutions, and there were no significant changes in US dollar flows between different types of institutions.