USD/CNH remains steady around 6.8800 despite PBoC maintains status-quo

On March 18th, the People’s Bank of China (PBoC) announced an unchanged interest rate policy despite the street’s expectations of further expansion in the monetary policy stance. The central bank kept the one-year and five-year Loan Prime Rate (LPR) steady at 3.65% and 4.30%, respectively. The demand for more stimulus to spur economic recovery hasn’t been met by the PBoC, but the USD/CNH pair has not shown a significant move in response to the monetary policy announcement.

Economists at UOB Group suggest an upcoming reduction in the Loan Prime Rate (LPR) at PBoC’s next meeting on March 20th. They anticipate the 1Y LPR to fall to 3.55% and the 5Y LPR to 4.20% after the National People’s Congress (NPC). The need for further support measures towards the real economy and for the 5Y LPR to fall further to boost demand for homes are the reasons behind this anticipated fall.

The US Dollar Index (DXY) is currently facing barricades in its attempt at recovery due to the expectations of a less-hawkish monetary policy announcement by the Federal Reserve (Fed), resulting in the acceleration of interest rate hike odds. According to CME Fedwatch tool, more than 77% odds are in favor of a 25 basis point (bps) interest rate hike on Wednesday, which would push interest rates to 4.75-5.00%.

Investors are now cheering the rescue plan for Credit Suisse. S&P500 futures are reviving firmly as UBS Group has agreed to buy Credit Suisse. Sky News reported that under the takeover, UBS will pay 3bn Swiss francs (£2.6bn) to acquire Credit Suisse. Additionally, they have agreed to assume up to 5bn francs (£4.4bn) in losses. Furthermore, 100bn Swiss francs (£88.5bn) in liquidity assistance will be available to both banks. This acquisition has led to a support of risk-sensitive assets by investors.

The Chinese economy has been on a steady road to recovery since the COVID-19 pandemic began. China’s GDP saw a growth of 2.3% in 2020, which helped create jobs and recover from the economic downturn. The expansionary monetary policy was expected to spur the economic recovery even further. With the prospect of reduced Loan Prime Rates, demand for homes may increase, leading to further economic recovery.

The world’s two largest economies, China and the US, have had an intense trade war in the past, with tariff wars and restrictions on imports and exports. However, the new Biden administration plans to review certain policies and remove some of the tariffs in place. This might lead to better trade relations, which would be beneficial for both countries.

In conclusion, the PBoC’s unchanged interest rate policy has not led to significant movements in the USD/CNH pair, but the anticipated reduction in the Loan Prime Rate may lead to further economic recovery in China. The US Dollar Index is facing hurdles in its recovery since the expectations of a less-hawkish monetary policy announcement have accelerated interest rate hike odds. Investors are cheering the UBS-Credit Suisse deal, leading to support of risk-sensitive assets. Finally, better trade relations between China and the US could lead to a more stable economic environment for both countries.


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