The U.S. dollar appreciated 67 pips against the Chinese yuan, to trade at 7.5510 yuan per dollar, on speculation that recent gains in U.S. stock markets may encourage the Federal Reserve to hold interest rates steady when the Federal Open Market Committee meets next September 18. Yet, Chinese Yuan 1 year non-deliverable-forwards traded at 7.1938 to the dollar, anticipating the Chinese yuan could be almost 5 percent stronger in one year's time. Moreover, Asian most important stocks markets closed down mostly on profit taking and ahead of an important week with key economic data for the U.S. economy, Asia’s biggest importer. The Shanghai Composite Index closed down nearly 27 points or 0.51 pct at 5,294.05 and the Hang Seng Index closed down 18.02 points at 23,886.07.

PBOC is Widely Expected to Continue with Interest Rate Hikes
In order to curb inflation the People's Bank of China (PBOC) has been increasing the price of money in the world’s most populated country. However, the recent performance of the Asian financial sector, slowed down by the collapse in securities backed by U.S. subprime mortgages made many traders question the hawkish stance of the Chinese monetary authorities. Now, with the U.S. economy showing the first signs of stabilization, the Chinese central bank will probably continue with its monetary tightening policy. In fact, just two weeks ago the PBOC decided to raise the benchmark interest rate for Renminbi lending and deposit for financial institutions “in order to appropriately rein in the supply of money and credit and stabilize inflation expectation”. The one-year benchmark deposit rate was raised from 3.33% to 3.60%, up 0.27 percentage points and the one-year benchmark lending rate was raised from 6.84% to 7.02%, up 0.18 percentage points.

Richard Lee is a Currency Strategist at FXCM.