Abstract: In the propulsion process of internationalization of the RMB, the market change is becoming increasingly complex, and presents the bilateral volatility trend with rise and fall. The exchange rate formation mechanism is no longer a single linear relationship, but shows a regime change. The empirical test shows that the impact of GDP, money supply and interest rate on exchange rate formation is different under the different regions of interest rates of China and U.S.A. This explains the RMB exchange rate against the U.S.A. dollar continued to decline during the second half of 2016. Although the China’s GDP continued to grow, under the influence of the interest rate rise in the U.S.A, the exchange rate fall under the condition of the narrow margin of the interest rate difference in China and U.S.A. Therefore, the discrete managed floating exchange rate regime should be applied to intervene and regulate the foreign exchange market. In the same regime international balance of payments should be frequently adjusted in narrow range, and in different regimes discrete cross-regime direction adjustment should be used.

Key words: exchange rate formation mechanism; bilateral fluctuation; regime transfer; Markov model