Forex
Yuan slides after PBOC, dollar little changed on MLK Day
© Reuters. U.S. Dollar and Chinese Yuan banknotes are seen in this illustration taken January 30, 2023. REUTERS/Dado Ruvic/Illustration
By Joice Alves and Rae Wee
LONDON/SINGAPORE (Reuters) -The yuan fell on Monday to a one-month low after China’s central bank surprised markets by keeping its medium-term policy rate steady, while the dollar was little changed on Martin Luther King (MLK) Jr. Day, a public holiday.
The People’s Bank of China (PBOC) left interest rates unchanged when rolling over maturing medium-term policy loans, defying market expectations for a cut to shore up China’s bumpy post-pandemic economic recovery.
That sent the sliding to a one-month low of 7.1813 per dollar before recouping some of those losses to trade down 0.08% at 7.1749.
Its offshore counterpart fell as far as 7.1906 per dollar, languishing near Friday’s one-month trough.
“China’s central bank kept its medium-term lending facility rate unchanged at 2.5%, contrary to the widespread consensus of a 10 basis points cut,” said Tommy Wo, senior economist at Commerzbank (ETR:).
However, rate cuts are still on the table, he added.
“The U.S. Fed’s pivot has allowed the PBoC to conduct more accommodative monetary policy. There will be more room for PBoC rate cuts when the timing of Fed’s rate reduction becomes clearer”.
China’s fourth-quarter gross domestic product (GDP), December industrial production, retail sales and unemployment rate are among the key economic indicators out on Wednesday, which are likely to provide further clarity on the outlook for the world’s second-largest economy.
The , measuring the U.S. currency against six peers, was little changed up 0.07% to 102.58, ahead of the U.S. Martin Luther King Day holiday on Monday.
Bets for Fed cuts this year, beginning as early as March, have risen after data on Friday showed U.S. producer prices unexpectedly fell in December, sending Treasury yields sliding in response. [US/]
“Despite the upside surprise to the CPI on Thursday, investors grew increasing confident that the Fed is likely to cut rates soon,” said Jim Reid, strategist at Deutsch Bank.
Market pricing now points to a 77% chance that the U.S. central bank will begin easing rates in March, as compared to a 68% chance a week ago, according to the CME FedWatch tool.
In the broader market, traders also have their eye on a reading on UK inflation due later in the week, as the market focus remains on how soon major central banks globally could begin easing rates this year.
Sterling slipped 0.2% to $1.2725, though it remained close to a two-week peak hit last week.
The euro hovered near the $1.10 mark and was last flat on the day at $1.0946.
In Asia, the yen remained under pressure, down 0.5% at 145.69 per dollar on expectations that the Bank of Japan is likely to keep its ultra-loose policy settings unchanged at its upcoming policy meeting next week.
TAIWAN AFTER THE ELECTION
Elsewhere, the Taiwan dollar fell to a more than three-week low of 31.284 per U.S. dollar, after the Democratic Progressive Party’s (DPP) Lai Ching-te won the presidency over the weekend, though his party lost its majority in parliament
Analysts expect Taiwan’s stock market to take a hit this week as the spectre of policy paralysis fuels selling in a market that is up 25% in little more than a year.
“DPP lost the majority in the parliament. Hence Lai is ruling with a weaker mandate than Tsai Ing-wen,” said Allan von Mehren, director at Danske Bank.
He expects continued tensions in the Taiwan Strait but not a further escalation.
“China will continue to deter Taiwanese independence with military drills around the island and Taiwan and the U.S. are likely to continue to have closer relations but without crossing China’s red line”.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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