Interest Rate Divergence Weakens Dollar To 17-Month Low Against Yuan: XPeng, Li Auto Among 4 Stock Movers

The U.S. dollar plunged to a 17-month low against the Chinese yuan after the Federal Reserve slashed rates as the People’s Bank of China held them steady overnight, raising pressures on interest-rate divergences between the world’s two major economies.

The People Bank of China (PBoC) opted to hold the one-year loan prime rate (LPR)—a critical benchmark for most corporate and household loans—at 3.35% during its September fixing. The five-year LPR, a reference for property mortgages, also remained steady at 3.85%.

According to the latest monetary report, China's economy grew by 5% year over year in the first half of 2024, showing resilience despite a complex global environment.

Inflation remained subdued, with the consumer price index (CPI) increasing by just 0.1% year-over-year. The central bank noted that while economic performance was stable, domestic issues such as “insufficient effective demand” and “the transition to new growth drivers” continue to challenge the economy.

The PBoC’s accommodative monetary stance is designed to provide necessary financial support for a sustainable economic recovery. However, it highlighted that external conditions remain “complex, grim, and uncertain,” contributing to a cautious approach to navigating headwinds.

Chinese Stock Market Performance

Chinese domestic stocks, as tracked by the Shanghai Composite Total Return Index, closed flat for the day, reflecting market uncertainty. However, offshore Chinese stocks fared better, with Hong Kong-listed entities, tracked via the iShares MSCI Hong Kong Index Fund EWH, advancing by more than 1%.

In U.S. premarket trading, major Chinese stocks listed on American exchanges also saw gains:

• XPeng Inc. XPEV: +3.3%
• Li Auto Inc. LI: +1.5%
• Alibaba Group Holdings Ltd. BABA: +1.3%
• Tencent Music Entertainment Group TME: +0.8%

Bank of Japan Holds Rates; Yen Slips

In Eastern Asia, the Bank of Japan (BoJ) also held interest rates steady at 0.25%, aligning with market expectations.

Japan's economy showed a moderate recovery, though signs of weakness were observed in certain sectors, according to the BoJ statement.

On the inflation front, Japan's core CPI (excluding fresh food) has risen by 2.5-3.0% year-over-year, driven by wage increases and moderate price hikes in services.

Following this announcement, the Japanese yen, tracked by the Invesco CurrencyShares Japanese Yen Trust FXY, fell by over 1% against the U.S. dollar. Meanwhile, Japanese equities rallied, with the Nikkei 225 index, as represented by the iShares MSCI Japan Index Fund EWJ, surging by 1.5% after a 3% gain in the earlier session.

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