Mon, October 03, 2022

Rate Cuts Crash Yuan

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The yuan slipped below a key level on Monday after further easing of monetary policy. Other Asian currencies fell in anticipation of a Federal Reserve meeting later this week.

The yuan saw a 0.4% drop. It traded at 7.0080 against the dollar. The Chinese currency crossed the significant seven thresholds for the second day in a row. The drop came despite a highly unusual midpoint correction by the central bank. On Monday, the People’s Bank of China cut the repo rate, speeding up money flow into the economy. This is primarily to promote economic development that has been severely hampered by the shutdown caused by the COVID-19 pandemic.

What Is Central Bank’s Next Move?

Central banks are struggling to balance encouraging economic expansion with preventing further depreciation of the exchange rate. The bank’s recent strong midpoint correction suggests it is unwilling to let the currency fall. China’s outlook could soon improve after a two-week COVID-19 lockdown in the major city of Chengdu is lifted. The economy has a long way to go to reach its peak before COVID.

The Malaysian ringgit was the worst performer in Southeast Asia, falling 0.3%, while the South Korean won lost 0.4%. The yen fell 0.2%, even though the country’s markets were closed for a holiday.

The Fed should increase interest rates by 75 basis points on Wednesday. After hotter-than-expected U.S. inflation figures last week, traders also factored in the probability of a 100-bps rise.

Inflation expectations and corporate pricing plans are low risks and GDP forecasts are uncertain. High inflation means 100 bp risk. However, if the Fed sends a bolder message about inflation volatility, the Fed’s point will better reflect market expectations for a final yield of 4.25-4.5%, according to ING analyst notes. The New Zealand dollar fell 0.5 percent to a two-year low in the Asia Pacific region.

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