The Chinese yuan gained 12 basis points against the US dollar, to close at 7.5870 on the exchange-traded session, on speculation the People's Bank of China (PBOC) will continue to increase interest rates to curb inflation in the world’s most populated country. On Tuesday, the PBOC lifted interest rates by 27bp, the fourth time this year, and the lending rate by 18bp. Moreover, Chinese Yuan 1 year non-deliverable-forwards traded at 7.208 to the dollar, anticipating the yuan could be almost 5 percent stronger in one year's time.

The Bank of China holds $9.7 billion in securities linked to subprime loans

Bank of China, the nation’s second-largest financial institution, benefited from wider interest margins and robust lending growth, reporting an upbeat 51 percent increase in first-half net profit. However, excitement over better-then-expected earnings was short-lived. The Beijing-based bank disclosed to the public that it holds approximately $9.7 billion in securities linked to subprime loans in the U.S. making them the largest holder of such securities in Asia. Performance in the Asian financial sector has been hindered by the recent collapse in securities backed by subprime mortgages leading to substantial losses. To mitigate any further downside risk of their CDO and ABS positions, the Bank of China set aside 1.15 billion yuan in reserves. In doing so, the bank hopes to restore any lost investor confidence in their debt securities which are currently rated “A” or higher according to Standard & Poor’s.

Inflation Readings in Singapore Reach Highest in a Decade

Consumer prices in Singapore quickened to the fastest pace since January 1995 printing a 2.6 percent increase from a year earlier. The announcement comes after the government raised the goods and services tax by 2 percent on July 1st to 7 percent to compensate for a revenue shortfall proceeding a reduction of corporate taxes. After progressing 1.3 percent in June, the data exceeded economists’ forecasts for a 1.7 percent increase underscoring a central bank warning of such an event. Attention is now turned to the central bank which expects 2007 inflation to reach 2 percent by next year. The Monetary Authority of Singapore sees no reason for a change in policy stance reaffirming a three-year initiative to quell inflation throught the “modest and gradual” appreciation in the Singapore dollar which has gained 0.7 percent this year.

Richard Lee is a Currency Strategist at FXCM.