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China bullies dollar bearsSurprise, surprise! Economic super bully China decided to give dollar bears wedgies by hiking rates by 25 basis points this week. Did you get one?

Thanks to a 25 basis point rate hike, China’s lending rate now sits at 5.56% while its deposit rate landed at 2.5%. This could be a sign that the central bank is expressing its confidence about China’s stellar economic performance. Or do they have something else up their sleeves?

Recall that the People’s Bank of China already implemented-not one, not two, but three rate hikes this year. Sure, they targeted the reserve requirement and not exactly their lending rates during those times, but a rate hike is still a rate hike, right?

Judging from this string of rate increases, it looks like China is dead-set on toning down inflation and extra liquidity in their system.

The most recent inflation report from China showed that prices rose 3.5% year-on-year in August. Lending also rose in September, indicating that liquidity has increased in the market. If China’s economy continues to expand at the rate it is going now, it could lead to hyperinflation and asset bubbles.

Take the country’s housing market for example. The report for September showed that, compared to 2009, property prices have risen a whopping 9.1%!

As a result of China’s less accommodative monetary policy, investors quickly pulled their money out of “risk” currencies such as the AUD, CAD, and NZD, back to the safety of the dollar. Apparently, investors believe that China’s interest rate hike could dampen growth in the region, which could negatively affect the already sluggish global recovery.

Checking out the PBOC’s monetary policy report for the third quarter, we see that our Chinese buds could have more hikes scheduled on their calendars than their counterparts across the Pacific Ocean.

It also showed the confidence of central bankers that the economy has got enough swagger to continue on the road to recovery. But, at the same time, they worried that inflation could become a major pain in the economy’s butt.

Given the divergence in the monetary policies between the PBOC and the Federal Reserve, which is rubbing sticks and stones just to spark inflation and growth with plans of stimulus packages, we may see USD/CNY continue on its downtrend.

But no worries dollar bulls, the Greenback may bring sexy back against its major counterparts on fears that global recovery would slow down.

In the meantime, be on your toes for economic data from China. Tomorrow’s roster of economic reports includes the GDP, consumer prices, retail sales, and industrial production. If those reports continue to show strength, it would give rise to further rate hikes from China and lead to another dollar rally.