1. Report Industry Investment Rating No information about the industry investment rating is provided in the content. 2. Core Viewpoints of the Report - The linkage between exchange rates and interest rates is the result of policy - goal trade - offs under the "Impossible Trinity". When the domestic fundamentals are resilient, policies block the interest - rate parity transmission through foreign - exchange management tools, and exchange rates and interest rates mainly reflect internal equilibrium. When fundamentals are under pressure and there are external shocks, policies allow exchange - rate flexibility, and the interest - rate parity mechanism dominates cross - border capital flows [4]. - The future scope for interest - rate cuts depends not only on the narrowing of the China - US interest - rate spread but also on whether broad - credit policies can stimulate domestic demand and whether trade transformation can strengthen exchange - rate resilience [4][11]. - The core contradiction in the current linkage between interest rates and exchange rates lies in the dynamic balance between external constraints and internal policy space. Policy frameworks need to reshape the transmission path of interest - rate spreads and exchange - rate differentials through tool innovation and expectation management [101]. 3. Summary According to Relevant Catalogs 3.1 Interest and Exchange Rate Correlation - Interest rates and exchange rates represent the internal and external prices of currencies respectively, with a high correlation. The exchange rate has a stronger correlation with long - term interest rates that reflect fundamental expectations and with the interest - rate spread that reflects China - US relative changes [7][19]. - The relationship between exchange rates and interest rates is complex, being affected by common factors and possibly being causal to each other. Under the "Impossible Trinity", policies need to make dynamic trade - offs among exchange - rate stability, capital flow, and monetary - policy independence [7]. 3.2 Linkage between Exchange Rates and Interest Rates under the "Impossible Trinity" 3.2.1 Stages Driven by Common Factors - When external shocks occur and domestic fundamentals are strong, policies prioritize "exchange - rate stability" and "monetary - policy independence" while weakening capital free flow. The ability of domestic fundamentals to "absorb" shocks determines whether exchange rates and interest rates are affected by external factors [8][32]. - Examples include the 2018 - 2019 China - US trade friction period and the 2020 - 2021 global public - health event period. In these periods, China maintained monetary - policy independence, and the correlation between interest - rate spreads and exchange rates decreased [40][44]. 3.2.2 Stages of Mutual Causality - When domestic and overseas monetary - policy cycles diverge and domestic fundamentals are under pressure, policies tolerate exchange - rate fluctuations to enhance monetary - policy autonomy. Capital flows affect exchange rates through the interest - rate parity mechanism, forming a self - reinforcing cycle [51]. - Examples are the period from August 2015 to 2016 and the 2022 - 2024 period. In these periods, the two - way causal relationship between interest - rate spreads and exchange rates was significant, and the explanatory power of the interest - rate parity theory increased [52][56]. 3.3 Application of Exchange - Rate and Interest - Rate Linkage in Bond - Market Investment 3.3.1 Arbitrage Calculation under the Covered Interest - Rate Parity (CIP) Theory - International investors calculate the comprehensive return of the China - US interest - rate spread and hedging costs when allocating RMB bonds. The balance between hedging costs and interest - rate spreads drives short - term bond - allocation preferences [9]. - The CIP theory provides a pricing benchmark for cross - border capital flows. When there are differences in comprehensive returns between domestic and foreign investments, investors will engage in arbitrage until the returns are equal [68][69]. 3.3.2 Impact of Central - Bank Exchange - Rate Stabilization Operations on Foreign Bond Purchases - Central - bank exchange - rate stabilization tools can reset arbitrage costs. For example, the counter - cyclical factor can reduce the forward - premium rate, while offshore - liquidity regulation can increase arbitrage friction costs, and macro - prudential tools can have a structural constraint on capital flows [86][91][92]. - Different types of foreign investors have different responses to central - bank policies. Short - term trading funds are more sensitive to arbitrage - friction costs, while long - term allocation funds may turn to holding medium - and long - term interest - rate bonds when the costs exceed a certain threshold [97]. 3.4 Future Outlook on the Linkage between Interest Rates and Exchange Rates - The core contradiction in the current linkage between interest rates and exchange rates is the dynamic balance between external constraints and internal policy space. The Fed's policy - turning rhythm and China's growth - stabilization needs are important factors influencing the linkage between interest - rate spreads and exchange rates [101][102]. - Policy frameworks need to reshape the transmission path of interest - rate spreads and exchange - rate differentials through tool innovation and expectation management to achieve a dynamic balance between "self - orientation" and "internal - external equilibrium" [101].