The yen, a proxy for the yuan, rallied against the majors after China said it will widen the yuan-dollar trading band effective May 21 and raise interest rates. The dollar dipped to as low as 120.70 versus the yen, and climbed back to above the 121 handle as the market digested China move.
The People’s Bank of China said on its website that the yuan will be allowed to move as much as 0.5% either side of a daily fixing rate against the dollar, up from 0.3%. The central bank will also increase its one-year lending rate by 0.18% to 6.57% and lift one-year deposit rate by 0.27% to 3.06%. This is a move intended to smooth the relationship with US and European countries before China Vice Premier Wu Yi meets US Treasury Secretary Henry Paulson next week and the G8 meeting in Germany over the weekend.
USDJPY encounters interim resistance at 121.40, backed by 121.70 and 122. Subsequent ceilings will emerge at 122.10, followed by 122.30 and 122.50. On the downside, support begins at 121 and 120.70, followed by 120.50. Additional floors are eyed at 120.30, backed by 120 and 119.80.
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