Recently, the People’s Bank of China announced the reduction of the Prime Loan Rate (LPR) at one year to 3.70%, having a reduction of 10 base points corresponding to the month of January, meanwhile, the Reference Loan Rate for a term of 5 years was stands at 4.6% with a reduction of 5 basis points, a situation that has not occurred since April 2020.
The preferential loan rate serves as a price reference for bank loans and surprisingly, the reduction in the 5-year rate caused variations in the bond market, which placed China’s Treasury bonds at 2.72%, minimum levels since June 2020 and US Treasuries at 1.84%, it is worth mentioning that the yield spread between the US and China has narrowed, and this has favored the performance of the USD/CNH pair, despite the trade challenges between both powers and the expectations of the Federal Reserve that put pressure on the supply and demand of the pair.
Diego Ramirez Financial Analyst at ProfitWay considers that the financial markets are increasing the degree of volatility as a result of the recent declarations of the president of the United States on commercial matters, acknowledging the efforts of the head of negotiations Katherine Tai to reduce the commercial disputes with her Asian counterpart, to Despite arguing that China is not fulfilling its purchase commitments, relating it to the interruption in the supply chain, a key factor in the increase in inflation, in addition to the ratification of support for the Governor of the Federal Reserve Jerome Powell in the intention to readjust monetary support despite expressing concern about the possible increase of faster interest rates in order to control the increase in inflation.
Additionally, the decision on the PBOC interest rate suggests a moderate stance of the economy, despite the positive economic data such as the annual GDP 2020 which stood at 8.1%, in addition to the increase in industrial production to 4.3% and the unemployment rate at 5.1%, which shows signs of gradual and medium-term recovery, generating optimism in the market.
US Jobless Claims, January Philadelphia Fed Manufacturing Survey and December Existing Home Sales are expected on the economic docket for the coming business sessions, with inflation data expected in the European environment and minutes of the latest monetary policy decision by the European Central Bank, as well as an appearance by Christine Lagarde.
ProfitWay considers that an intraday close below the six-week support at 6.3450 becomes necessary for the trend of the USD/CNH pair to reach the 2021 low at the price of 6.3305 and if this is not achieved, it could present a corrective reversal towards the first price resistance 6.3585 yuan per dollar.
Financial analyst at ProfitWay Mexico. https://profitway.mx/
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