U.S. dollar rebounded on Monday. What about Chinese yuan?

The U.S. dollar recovered on Monday after declining at the end of the last week. Soft economic data in China, along with surging oil prices, concerned investors. They fear that inflation will push interest rates higher. In the Asian session, the dollar gained a bit along with U.S. yields. It managed to stop a decline it suffered last week. Overall, the greenback soared by approximately 0.2% against the euro. It also climbed up by 0.1% against the Japanese yen, pushing the latter close to a new three-year low.

Meanwhile, the New Zealand dollar was an outlier. It had skyrocketed by almost 0.5% to a one-month high of $0.7105. However, the Kiwi decreased later and traded flat at $0.7071 at last due to a decade-high quarterly inflation reading.

The British pound managed to remain mostly steady thanks to hawkish weekend remarks from Bank of England Governor Andrew Bailey. He announced that policymakers would have to act as energy prices push consumer prices higher. The Sterling exchanged hands at $1.3734, remaining just below Friday’s one-month peak of $1.3773.

 On Monday, new data showed that China’s economic growth hit its slowest pace in a year in the third quarter. Power shortages crimped factory output. Meanwhile, crude prices soared by more than 1% in commodities, testing 2018 highs.

 The Chinese yuan tumbled down slightly after the release of this data. It seems China’s slowdown, along with power crunch and global signs that pressure from energy costs is hurting the economy, is making investors broadly cautious. They are bracing for a bumpy period.

 HSBC analysts wrote that for some time, their main argument has rested on two factors coming together to support the greenback: the Federal Reserve taking a gradual path towards rate hikes and the moderation in global economic growth. However, that occurred sooner than they expected.

How did the Australian dollar fare?

The dollar gained roughly 0.2% at $0.7402 against the Australian dollar on Monday. It also traded at 114.35 yen at last and at $1.1579 against the euro. Overall, the dollar index climbed up by 0.1% to 94.102 today, edging toward a one-year high of 94.563 reached last week.

 Last Wednesday, the Federal Reserve published the minutes from its meeting in September, affirming traders’ expectations that the central bank plans to start tapering asset purchases this year. In addition, the minutes showed that policymakers want to start tapering soon. They aim to wrap up the process by the middle of next year. 

According to forecasts, rate rises for Fed Futures will begin soon after that is complete. Markets have already moved forward hike time to as soon as the third or fourth quarters of 2022. Moreover, two-year Treasury yields surged to a 19-month high of 0.421%. Swaps pricing also shows increasing pressure worldwide. This year, there is nearly a 30% chance of a Bank of England rate hike, along with almost 80 basis points of hikes priced through 2022.

 In New Zealand, consumer prices soared higher at their fastest clip since 2010. Analysts expect the central bank to stay the course on its hiking trajectory even though the authorities extended the Coronavirus lockdown in Auckland. Westpac analyst Imre Speizer stated that it just reinforces the case that the Central bank needs to stick to that path. Inflation is very strong currently.

 Meanwhile, the Australian central bank reiterated that it expects to keep rates on hold until 2024. However, swaps are pricing these hikes to start in mid-2022.

What are the main events this week?

 Monday’s session was relatively quiet, though. Traders are currently looking ahead to the release of the Federal Reserve’s beige book of economic conditions, which is due on Wednesday. They are also keeping an eye on China’s credit markets. Several developers are also due to pay coupon payments this week.

 In China, coal prices rallied to a record high on Monday after the data showed that the supply of the fuel sharply decreased in September. Traders are also concerned that domestic output may be unable to meet soaring electric generation demand. This news may push the yuan lower in the coming days.