Macroscope | Forex investors are well placed to profit from divergent US and Chinese monetary policies

While a narrowing yield differential would normally make the renminbi less attractive, China’s economic heft and increasing trade surplus support a strong currency

The trend of rising global energy and commodities prices should also be on investors’ radar with regards to currencies of producer countries

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Chinese renminbi and US dollar banknotes are seen in February 2020. With the China-US trade balance heavily skewed in Beijing’s favour, the demand for renminbi will remain strong. Photo: Reuters

Published: 6:45am, 26 Jan 2022

With China and the United States going in opposite directions on monetary policy, investors will need to identify how best to benefit from this. In the currency space, this will mean not only focusing on interest rate differentials but also factoring in the impact of commodity price moves.

First, the US Federal Reserve has received the green light from President Joe Biden to tighten monetary policy (not that it needs White House approval). “Given the strength of our economy and pace of recent price increases, it is appropriate – Fed chairman [Jerome] Powell has indicated – to recalibrate the support that is now necessary,” Biden said last week.

How far they interest rates rise remains to be seen, but the direction is clear.

The trajectory of monetary policy in China is equally clear. But the People’s Bank of China is going in the opposite direction: the PBOC trimmed its benchmark lending rate for the second month in succession last Thursday while also cutting a mortgage reference rate for the first time since 2020.

Under-construction apartments are seen during sunset in the Shekou area of Shenzhen, Guangdong province, on November 7 last year. China’s central bank last week lowered the five-year loan prime rate, a reference rate for mortgages, a move that has cheered China’s beleaguered property sector. Photo: Reuters

Having cut the one-year loan prime rate in December, on which most new and outstanding loans are priced, to 3.8 per cent from 3.85 per cent, the PBOC lowered it again, to 3.7 per cent, at the January fixing. As for the five-year loan prime rate, a reference rate for mortgages, the central bank trimmed that to 4.6 per cent from 4.65 per cent, the first adjustment since April 2020.