USD/CNH bounces off 19-week low as PBOC holds Interest Rate intact for 18 months

• USD/CNH struggles for clear direction near four-month low, fades bounce off multi-day bottom of late.
• PBOC kept five-year and one-year rates unchanged as widely expected.
• IMF’s Berger cites accumulating downside risk for China even as Evergrande fears contained for now.

USD/CNH consolidates the biggest daily losses in 11 months around $6.3850 during early Wednesday. In doing so, the offshore Chinese currency (CNH) pair portrays a rebound from the lowest levels since June even as the US Dollar Index (DXY) prints a six-day downtrend near the late September lows.

The USD/CNH pair’s corrective pullback could also be linked to the People’s Bank of China’s (PBOC) inaction, matching market forecasts. The Chinese central bank held the one-year loan prime rate (LPR) at 3.85% for the 18th month in a row at its October fixing. Further, the five-year LPR was also left unchanged at 4.65% in October.

On a different page, the International Monetary Fund’s (IMF) China Mission Chief and Assistant Director in the Asia and Pacific Department, Helge Berger highlights risks emanating from the world’s second-largest economy. The diplomat signaled that the Evergrande risk to China is contained for now but the nation is accumulating downside risks.

It should be noted that the escalation in the Aussie-China tussles and the Fed tapering concerns battle the hopes of overcoming China’s coal shortage to portray mixed sentiment. 

On a different page, Fed Governor Christopher Waller was the latest to support rate hike as saying, per Reuters, “If inflation keeps rising at its current pace in coming months rather than subsiding as expected, Federal Reserve policymakers may need to adopt ‘a more aggressive policy response’ next year.” Additionally, Reuters’ latest poll of economists cites the risk of an earlier rate hike by spotting the reflation fears.

To portray the mood, the US 10-year Treasury yields rise 3.8 basis points (bps) to 1.672%, a fresh high since late May, while the US Dollar Index (DXY) fades rebound from a three-week low, tested on Tuesday, by easing near 93.70 at the latest.

Given the light calendar and mixed concerns over China’s economic growth, USD/CNH traders may have to pay close attention to the risk catalysts for fresh impulse. It should be observed that the International Monetary Fund (IMF) expects the Chinese economy to grow by 8% in 2021 but added that the economic recovery remains unbalanced, per Reuters.

Technical analysis

Unless providing a daily closing beyond February’s low surrounding $6.4000, USD/CNH remains vulnerable to test the yearly bottom of $6.3524.