New Zealand Dollar declines below 0.5850, PBOC leaves lending benchmarks unchanged

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The NZD/USD pair declines to around 0.5820 during the Asian trading hours on Wednesday. The US Dollar (USD) strengthens against the New Zealand Dollar (NZD) on rising tensions in the Middle East and a higher-for-longer Federal Reserve (Fed) interest rate stance.

NZD/USD edges lower to near 0.5820 in Wednesday’s Asian session.
Traders reprice the chance that the Fed would have to tighten policy to contain inflation.
China left lending benchmarks unchanged in May.

Reuters reported on Tuesday that US President Donald Trump said that Washington may need to strike Iran again and that he had been an hour away from ordering an attack before postponing it. Earlier on Monday, Trump stated that he had paused a planned resumption of hostilities following a new proposal by Tehran to end the US-Israeli war.

The hotter-than-expected US inflation report released last week has reinforced a "higher-for-longer" Fed rate stance, which provides some support to the Greenback. Traders are pricing in a 41.5% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

The People’s Bank of China (PBOC) on Wednesday left Loan Prime Rates (LPRs) unchanged for the 12th consecutive month in May, in line with market expectations. The one-year and five-year LPRs were at 3.00% and 3.50%, respectively. PBOC's quarterly report suggested that policymakers are in no rush to cut rates, despite lingering softness in economic activity and lending.

PBOC FAQs

What does the People's Bank of China do?

The primary monetary policy objectives of the People's Bank of China (PBoC) are to safeguard price stability, including exchange rate stability, and promote economic growth. China’s central bank also aims to implement financial reforms, such as opening and developing the financial market.

Who owns the PBoC?

The PBoC is owned by the state of the People's Republic of China (PRC), so it is not considered an autonomous institution. The Chinese Communist Party (CCP) Committee Secretary, nominated by the Chairman of the State Council, has a key influence on the PBoC’s management and direction, not the governor. However, Mr. Pan Gongsheng currently holds both of these posts.

What are the main policy tools used by the PBoC?

Unlike the Western economies, the PBoC uses a broader set of monetary policy instruments to achieve its objectives. The primary tools include a seven-day Reverse Repo Rate (RRR), Medium-term Lending Facility (MLF), foreign exchange interventions and Reserve Requirement Ratio (RRR). However, The Loan Prime Rate (LPR) is China’s benchmark interest rate. Changes to the LPR directly influence the rates that need to be paid in the market for loans and mortgages and the interest paid on savings. By changing the LPR, China’s central bank can also influence the exchange rates of the Chinese Renminbi.

Are private banks allowed in China?

Yes, China has 19 private banks – a small fraction of the financial system. The largest private banks are digital lenders WeBank and MYbank, which are backed by tech giants Tencent and Ant Group, per The Straits Times. In 2014, China allowed domestic lenders fully capitalized by private funds to operate in the state-dominated financial sector.