[In-Depth] Recent Analysis of Offshore RMB Swap Curve Changes

Due to the dual impact of the escalating situation in the Middle East and the People’s Bank of China’s RMB exchange rate adjustment policy, the offshore RMB market is experiencing key changes.

The ongoing escalation of the Middle East conflict has driven up international oil prices, while inflationary pressures in the U.S. have risen and expectations for Fed rate cuts have contracted, leading to a renewed strength of the dollar; meanwhile, the People’s Bank of China has introduced integrated cross-border interbank financing rules and lowered the reserve requirement ratio for forward foreign exchange sales, which has released offshore RMB liquidity and alleviated the RMB appreciation pressure. Amid multiple factors at play, the long end of the offshore RMB swap curve has significantly retreated.

Recent analysis of the changes in the offshore RMB swap curve

Geopolitical conflicts have directly triggered sharp fluctuations in international oil prices, with skyrocketing oil prices boosting global inflation expectations. The Fed kept the target range for the federal funds rate unchanged at 3.5-3.75% during its March meeting and signaled a hawkish tone, leading the market to largely retract expectations for further rate cuts this year. High expectations for interest rates have placed significant downward pressure on the offshore RMB swap curve.

Figure 1: Bloomberg-calculated probabilities of Fed rate hikes

Data source: Bloomberg, based on interest rate futures contracts and interest rate derivatives.

Since the end of February, the People’s Bank of China has introduced two policies that have also become key variables affecting the offshore RMB market.

On February 26, the integrated cross-border interbank financing framework was announced to increase RMB supply abroad under controllable risks and reduce financing costs, thus slowing down the appreciation momentum of the RMB, which is bearish for the offshore RMB swap curve. On February 27, it was announced that the reserve requirement ratio for forward foreign exchange sales would be lowered to 0%, reducing the costs of banks’ forward foreign exchange sale operations, which is beneficial for releasing corporate demand for forward foreign exchange purchases.

From a mechanisms perspective, although banks’ hedging transactions for forward foreign exchange sale exposures may drive up swap points, corporate foreign exchange purchase behavior is not influenced by a single factor. If their long-term expectations for RMB appreciation remain unchanged, the policy’s stimulus on foreign exchange purchase demand and its effect on the long end of the swap curve may be limited.

After the policy was implemented, the offshore RMB spot market quickly cooled down, and on March 2, the offshore RMB exchange rate against the dollar fell below the 6.90 mark, retreating by more than 200 basis points in a single day, reversing the previous unilateral appreciation trend. Since March, the swap curve has shown mixed performance at both ends: the short end 1-month swap points fell from -139 at the end of February to -160 before recovering to -150, while the 3-month swap points corrected from -390 to -410 and then rebounded to -385, before falling back to around -420; the long end 1-year swap points have been on a downward trend since the end of February, cumulatively correcting 310 basis points from -1350 to -1660. It can be seen that the long end of the swap points is more influenced by the China-U.S. interest rate differential, while the short end, though down, has seen relatively limited movement, providing some support to the long end.

Figure 2: Trend of the offshore RMB swap curve against the dollar over the past month

Data source: Bloomberg.

The PBOC’s policies target the one-sided appreciation expectations of the RMB by releasing demand for foreign exchange purchases and increasing offshore RMB liquidity, weakening pro-cyclical effects, and slowing down RMB appreciation momentum, but have not changed the long-term appreciation trend of the RMB. Since the fourth quarter of 2025, China’s strong trade surplus and seasonal settlement demand have pushed both onshore and offshore RMB into an appreciation channel. This is also the core reason why, despite the dollar’s rebound since March, the onshore and offshore RMB spot exchange rates have only slightly weakened and have gradually entered a balanced stabilization phase.

In the short term, the offshore RMB swap curve will still be in a two-way game of geopolitical risk and policy adjustment. If the situation in the Middle East does not effectively ease and oil prices remain high, it will further elevate U.S. inflation and expectations for high interest rates, while if offshore RMB liquidity further loosens, the swap curve will maintain a low level of fluctuation.

Forecasting exchange rate and swap point trends

In the short term, the USD/CNH exchange rate will remain within a two-way fluctuation range of 6.85-6.95, influenced by the hedging effect of geopolitical risks and policy adjustments, making a unilateral trend unlikely; in the medium to long term, as the Chinese economy recovers and the China-U.S. interest rate differential gradually narrows, the annual exchange rate center will steadily rise, with the year-end expected to return to the 6.75-6.85 range.

As for the one-year USDCNH swap points, influenced by high U.S. interest rates and the China-U.S. interest rate differential, they are expected to continue to trend weakly in the short term, oscillating in the [-1500, -1700] range. If expectations for Fed rate cuts rise later, the downward movement of swap points will gradually narrow and lead to a correction.

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Editor: Song Yafang