Yuan sinks after PBOC keeps rate steady; little change to US dollar on MLK Day

The yuan fell on Monday (Jan 15) to a one-month low after China’s central bank surprised markets by keeping its medium-term policy rate steady, while the US dollar was little changed on Martin Luther King (MLK) Jr Day, a US 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 onshore yuan sliding to a one-month low of 7.1813 per US dollar before recouping some of those losses to trade down 0.08 per cent at 7.1746.

Its offshore counterpart fell as far as 7.1912 per US dollar, languishing near last Friday’s one-month trough.

“Some economists have argued that the PBOC may have chosen to hold rates steady to avoid further downside in the yuan, and excess volatility in the FX market,” said Kathleen Brooks, research director at XTB.

Rate cuts could still be on the table, said Tommy Wo, senior economist at Commerzbank. “The US 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.”

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China’s fourth-quarter gross domestic product, 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 US dollar index, measuring the greenback against six peers, was up 0.02 per cent to 102.53, on the MLK Day holiday.

Bets for Fed cuts this year, beginning as early as March, rose after data last Friday showed that US producer prices unexpectedly fell in December, sending Treasury yields sliding in response.

“Despite the upside surprise to the CPI (consumer price index) on Thursday, investors grew increasing confident that the Fed is likely to cut rates soon,” said Jim Reid, strategist at Deutsche Bank.

Market pricing now points to a 77 per cent chance that the US central bank will begin easing rates in March, from a 68 per cent chance a week ago, indicated the CME FedWatch tool.

In the broader market, traders also have their eye on a reading on UK inflation and job data 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 per cent to US$1.2723, though it remained close to a two-week peak hit last week.

The euro hovered near the US$1.10 mark and was last 0.05 per cent higher on the day at US$1.0955.

In Asia, the yen remained under pressure, down 0.63 per cent at 145.84 per US dollar, moving closer to its lowest level since mid-December, on expectations that the Bank of Japan is likely to keep its ultra-loose policy settings unchanged at its upcoming policy meeting next week.

Elsewhere, the Taiwan dollar fell to a more than three-week low of 31.284 per US 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 now fear policy paralysis. “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 US is likely to continue to have closer relations but without crossing China’s red line.” Reuters