Chinese Rate Hike in Line with Expectations; Are Future Rate Hikes on the Horizon?
Accelerating inflationary pressures have wreaked havoc on Chinese households’ wealth in recent weeks, inciting the People’s Bank of China to once again raise interest rates. The central bank raised the one-year lending rate by 25 basis points to 6.06 percent, while boosting the one-year deposit rate to approximately 3.00 percent. While the Yuan gained slightly against the Dollar, it was the Aussie and the Kiwi that suffered the most in the aftermath of the rate decision, as they are two of China’s largest trading partners. The key interest rate benchmarks are likely to increase in the coming months as well, with inflationary pressures giving few signs that they are ready to abate, potentially signaling further losses to the Aussie and Kiwi against the Dollar and Yen on further news of rate hikes. With consumer-price gains outpacing the deposit rate by nearly 200 basis points, it appears that savers still have an incentive to buy goods and assets.
With one rate hike now out of the way, markets have priced in an additional two over the coming months. Given the trade relationships that China has with Australia and New Zealand, interest rate hikes by the People’s Bank of China have translated into declines by the Aussie and the Kiwi versus the Dollar – in the hours following the decision, both the Aussie and Kiwi declined against the Greenback.
The AUD/USD pair dropped almost 40-pips immediately on the news (the Kiwi fared similarly), while falling 68.5-pips in just under two hours as the dust settled following the rate decision. The same can be said for the AUD/JPY and NZD/JPY pairs. Accordingly, going forward, shorting the Aussie or Kiwi, particularly against the U.S. Dollar or Japanese Yen, looks to be profitable when China raises its interest rates.
The increase in the rates is the third such move since October, as expected, especially before next week’s data release on inflation. The repercussion will be long-reaching, however. Since the last rate hike, the Yuan has appreciated slightly against the U.S. Dollar, falling from 6.5883 to 6.5860. The trade balance surplus has been steadily declining since October, and survey figures for next Monday’s data release for imports and exports project an even slimmer trade surplus.
The People’s Bank of China’s concurring decisions to raise rates have been predicated on the necessity to contain food and housing prices. China’s Consumer Price Index has been positive since November 2009, and according to the most recent CPI release on January 20, 2011, inflation grew at a 4.6 percent clip after beating expectations in December, which showed inflation grew at a 5.1 percent pace; the People’s Bank of China aims to maintain an inflation rate of 3 percent. The People’s Bank of China effort is a clear confirmation that inflation is a real concern, and thus rate hikes will be necessary to keep economic growth on a stable trajectory; China will intervene on some indirect level. Next Tuesday, inflation data for January will be released: current projections have the CPI increasing by 5.3 percent in January, while the Producer Price Index is forecasted to increase by 6.5 percent over the same period.
With one rate hike now out of the way, markets have priced in an additional two over the coming months. Given the trade relationships that China has with Australia and New Zealand, interest rate hikes by the People’s Bank of China have translated into declines by the Aussie and the Kiwi versus the Dollar – in the hours following the decision, both the Aussie and Kiwi declined against the Greenback. Accordingly, going forward, shorting the Aussie or Kiwi, particularly against the U.S. Dollar, looks to be profitable when China raises its interest rates.
Written by Christopher Vecchio, DailyFX Research
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