Yuan Drops to One-Month Low While the Dollar Remains Stable Amid Public Holiday

LONDON/SINGAPORE, Jan 15 - The Chinese yuan took a hit and fell to its lowest in a month after an unexpected move by the People's Bank of China (PBOC), which decided to maintain its medium-term policy rate, contrasting with market predictions that anticipated a rate decrease. This decision was primarily aimed at supporting China’s recovery from pandemic-induced economic disturbances.

Consequently, the onshore yuan value plummeted, reaching a one-month nadir at 7.1813 against the dollar, before making a minor recovery, resulting in a 0.08% drop at 7.1749. The offshore yuan experienced a similar downturn, touching 7.1906 against the dollar, and echoing the low point it reached last Friday.

Market Expectations Upset

"The PBOC's decision to keep its medium-term lending facility rate at 2.5% caught the market off-guard, as the consensus was leaning towards a 10 basis points cut," explained Tommy Wo, a senior economist at Commerzbank. He also suggested that future rate cuts are still a possibility, especially as the timing for the Fed’s rate reduction becomes more apparent, offering more leeway for the PBOC to adopt more accommodating monetary policies.

China's upcoming economic data release, including fourth-quarter GDP, December industrial production, retail sales, and unemployment rates, set for Wednesday, is expected to shed more light on the economic trajectory of the world’s second-biggest economy.

US Currency Unmoved on Holiday

Meanwhile, in the United States, the dollar index, which is a measure against a basket of international currencies, showed little movement with a slight increment of 0.07% at 102.58, coinciding with the nation's observance of Martin Luther King Jr. Day.

Market predictions for the Federal Reserve to lower interest rates have intensified following a surprise drop in US producer prices for December, contributing to a decrease in Treasury yields. Currently, market indicators reflect a 77% likelihood of a rate cut by the US central bank come March, marking an uptick from last week’s 68%, according to the CME FedWatch tool.

Global Central Banks and UK Inflation Watch

Investors are also closely monitoring the UK’s upcoming inflation data and the broader anticipation around when major central banks worldwide might start relaxing monetary policies this year. The British pound witnessed a 0.2% fall to $1.2725 but remained in proximity to its two-week high from the previous week. The euro stayed virtually unchanged at $1.0946, hovering around the $1.10 mark.

In Asia, the Japanese yen saw a 0.5% depreciation to 145.69 versus the dollar, amidst expectations that the Bank of Japan will sustain its ultra-loose monetary policy at its next week’s policy meeting.

Taiwan's Currency and Politics

The Taiwan dollar also reported losses, hitting a three-week low of 31.284 against the US dollar following the election results over the weekend where the Democratic Progressive Party (DPP) succeeded in securing the presidency but lost its parliamentary majority. According to analysts, the result may have negative repercussions for Taiwan’s stock market as fears of policy deadlock could prompt selling in a market that has seen a 25% increase in just over a year.

"DPP’s loss of the majority in parliament means Lai is governing with a weaker mandate than his predecessor Tsai Ing-wen," said Allan von Mehren, from Danske Bank. He anticipates continued tension across the Taiwan Strait but no escalation in hostilities. "While military drills by China around Taiwan are expected to persist as a deterrent against any Taiwanese independence moves, relations between Taiwan and the US are likely to strengthen, albeit without infringing upon China's stated limits".

yuan, dollar, PBOC