- USD/CNH depreciates as PBOC-backed Chinese media reported that the Yuan remains stable and balanced.
- China's 10-year yield fell to 1.805%, with the spread between Chinese and US yields expanding to nearly 250 basis points.
- Traders await US November Producer Price Index data due on Thursday to gain fresh impetus.
USD/CNH retraces its recent gains from the previous session, trading around 7.2660 during the Asian hours on Thursday. PBOC-affiliated Chinese financial media reported that the Yuan remains stable and balanced. The People’s Bank of China (PBOC) set the central rate for USD/CNY, the Chinese Yuan onshore, for Thursday's trading session at 7.1854, compared to the previous day's fix of 7.1843.
Unnamed experts cited by the PBOC-backed media suggest that the possibility of the US Dollar (USD) weakening is increasing, aligned with expectations of the Federal Reserve (Fed) cutting rates in December. Consequently, the Chinese Yuan is expected to continue fluctuating in both directions under market forces.
On Thursday, Chinese long-term yields fell, expanding the yield disadvantage of 10-year treasuries against US counterparts to the widest level in over 22 years. China's 10-year yield dropped to a low of 1.805%, with the spread between China and US yields expanding to nearly 250 basis points, the largest gap since June 2002.
The offshore Yuan (CNH) faced challenges following reports that top leaders and policymakers in China considered letting the currency fall in response to an expected sharp hike in US tariffs, per Reuters. The tariffs could include a universal 10% import duty and a 60% duty on Chinese goods entering the United States (US).
On Tuesday, China President Xi Jinping stated, "China has full confidence in achieving this year's economic target." Xi emphasized that China will continue to serve as the largest engine of global economic growth and asserted that there would be no winners in tariff wars, trade wars, or tech wars.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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