USD/CNH remains bid as China keeps interest rates unchanged

  • USD/CNH extends gains to 6.9975 from 6.9940 after PBOC’s rate decision. 
  • The central bank kept rates unchanged at 3.85% as expected. 
  • The US-China tensions and the decline in the US stock futures is likely weighing over yuan. 

USD/CNH continues to gain altitude despite the People’s Bank of China’s (PBOC) status quo decision on interest rates.

The pair is now trading at session highs near 6.9973, representing a 0.18% gain on the day, having hit a low of 6.9882 early Monday. 

The central bank kept one-year and five-year loan prime rates unchanged at 3.85% and 4.65% unchanged as expected by markets. The decision to hold rates steady comes after the data released last week showed the industrial production rose 4.8% year-on-year in June to register expansion for the third straight month and the economy grew 3.2% in the second quarter following a record slump in the January to March period.

However, the offshore yuan (CNH) has so far failed to pick up a bid on PBOC’s decision to keep rates steady. Markets look to be offering the Chinese currency on escalating tensions between the US and China. 

Last week, China imposed sanctions on US politicians including Sens. Ted Cruz and Marco Rubio for condemning Beijing’s treatment of Uighur Muslims and other minorities. Tensions between the two nations have escalated in recent weeks with China imposing a new security law on the semiautonomous region of Hong Kong and the US retaliating by suspending its special trade measures with Hong Kong.

The legendary hedge fund manager Ray Dalio said last Thursday that the economic tensions between the US and China could conceivably escalate into a "shooting war."

Apart from that, the 0.40% decline in the S&P 500 futures seen at press time could be boding well for the greenback. Investors are likely disappointed by European leaders’ failure to carve up a vast recovery fund designed to help haul Europe out of its deepest recession since World War Two.

The sentiment, however, may change during the day ahead, as the Congress is set to begin debating a new aid package this week to help the economy absorb the shock arising from the second wave of the coronavirus outbreak. 

Technical levels

 

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