Roiled by comments made by central bank Governor Zhou Xiaochuan, equity markets were taken back as investors continued to fret over another plausible rate hike in the short term. Over the weekend, the governor not only noted that share values were completely overvalued, but that central bank policy makers weren’t able to rule out a near term rate hike. “We’re not sure whether there’s a clear bubble but we worry”, Zhou told reporters in Basel, Switzerland. “We don’t rule out further rate increases if necessary.” As a result, with speculation heightened, traders pared back shares on the CSI 300 benchmark, taking the index lower by 4.3 percent in the overnight session. Falling 173.84 points, the index closed at 3,877.59. Incidentally, the Shanghai Composite dropped 3.7 percent to close at 3,941.08. Banking and insurance stocks helped to mitigate the overall decline, as sentiment remains high that equity speculation will likely continue despite recent warnings. The bearish undertones helped to fuel declines in other markets, notably in Hong Kong and Singapore. Shares in Hong Kong slid from a record as the Hang Seng dropped 177.55 to close at 21,822.35. The Singapore Straits Times index wasn’t able to fare any better dropping 35.05 points to close at 3,580.33.



Chinese Yuan Expected To Move In “Stable and Gradual” Rate
Further indications that government officials are keeping a “stable and gradual” approach when it comes to the yuan exchange rate policy surfaced in the overnight. Talking to reporters at the World Economic Forum in Singapore, Assistant PBoC Governor Yi Gang stated that the “central bank of China has the responsibility to keep the exchange rate at more or less a stable level.” The indications come amid growing pressure from global trade partners, including Europe and the US, in revaluing the underlying yuan currency and confirm no forthcoming action by Chinese officials. Incidentally, adding that the “mechanism is more toward a market oriented direction” Yi’s comments helped to pare back speculation in the Chinese yuan, kicking the rate against the US dollar up to 7.6212 in the overnight session.

China Maintains Dollar Portion In FX Reserves
Shortly after noting that Chinese officials prefer a more “stable and gradual” approach in the Chinese yuan, Assistant Governor Yi Gang indicated that China will keep current dollar holdings intact as the greenback stands as one of the safest investment options currently available. “Safety, return and liquidity are the three most important elements that people should consider when they talk about reserves.” Yi also reaffirmed that any reduction in the amount of dollar holdings would be “incremental” in nature. The comments are in line with overall market sentiment as the country has amassed a $1.2 trillion FX reserve, with a majority of the assets being in dollar denominations.

Singapore Inflation Climbs To A 10-Month High
Inflation in the Singapore economy crept higher to a 10-month top as food costs helped to buoy the overall figure. According to the Department of Statistics, prices advanced by 1 percent on the annualized comparison, higher than the 0.6 percent viewed in the month of April. For the record, food prices that constitute 23 percent of the overall index, advanced an impressive 1.4 percent in May. Additionally, transport costs rose 1.1 percent in the month, contributing 22 percent of the overall index. With inflationary pressures rising, monetary authorities are likely to keep steady in their stance of an appreciating currency helping to alleviate rising prices. As a result, the Sing dollar was able to gain on the greenback, rising to 1.5368 in the overnight.

Richard Lee is a Currency Strategist at FXCM.