This week marks a significant event in the financial world as six central banks are set to convene for policy deliberationsThe market consensus indicates that three of these institutions are expected to lower interest rates, one will maintain its current rate, and interestingly, one is likely to increase ratesHowever, there appears to be a lack of assessment regarding the upcoming rate decision from one central bank amid this whirlwind of changes!

The South Korean capital market is facing a daunting declineOn the morning of December 9, the Korea Composite Stock Price Index (KOSPI) opened lower and continued to slump, with the index at one point dropping over 2%. The KOSDAQ, which reflects smaller companies, hovered close to a 4% dip, showing a staggering decline of over 30% from its peak in March

This descent is attributed to fears of ongoing political and economic uncertainties.

In currency markets, the Chinese yuan has again breached the 7.3 mark against the US dollar, marking the second such occasion this yearThis depreciation adds another layer of complexity to the economic landscape as it signals ongoing pressures on the currency.

Global Central Banks Enter Rate Decision Cycle

Major central banks across four continents, including the Reserve Bank of Australia, the Bank of Canada, the Central Bank of Brazil, the European Central Bank (ECB), the Swiss National Bank, the Danish National Bank, and the Central Reserve Bank of Peru, are all slated to announce their final interest rate decisions for the year this week.

The stance of the Reserve Bank of Australia, as expressed by Governor Michelle Bullock, remains decidedly hawkish, suggesting that potential inflation levels are still deemed "too high." She anticipates that inflation will not return to sustainable target levels until before 2026. Unless there are positive shifts in the inflation outlook, the RBA is unlikely to abandon its position of maintaining higher interest rates for an extended duration.

Concerns regarding possible border issues disrupting trade have led to speculation that the Bank of Canada may cut rates by 50 basis points this Wednesday

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The market currently estimates a 65% likelihood for this rate cut, a significant increase from the 58% probability noted before the latest employment data was released.

This Thursday, four central banks will announce their rate decisions, with a keen focus on the ECB and the Swiss National BankFinancial analysts widely expect ECB President Christine Lagarde and her colleagues to announce a rate cut of 25 basis points during their upcoming meeting.

Since March, the Swiss National Bank has reduced rates three times, becoming the first developed country to decrease ratesInflation in Switzerland, measured by the Consumer Price Index (CPI), shows a year-on-year growth rate of 0.7%, falling short of the expected 0.8%. The market widely anticipates at least a 25 basis point cut from the Swiss National Bank this December.

On the same day, the market forecasts a 75 basis point hike from the Central Bank of Brazil.

Meanwhile, although the US Federal Reserve is not scheduled to announce its December interest rate decision until next week and is currently in a quiet period before the meeting, investors may still speculate about potential rate cuts this week

This is notably in light of the crucial US November CPI data set to be released on Wednesday.

Economists involved in market surveys forecast that the CPI report will show core inflation remaining stubbornly high for NovemberMacro economist Anna Wong stated: "The November non-farm payroll report does not guarantee a rate cut in December, but it does not eliminate the possibility eitherWe believe that the CPI report, which will be published on December 11, will be key in deciding whether a rate cut occurs this month."

Is There a Possibility of a Reserve Requirement Ratio Cut in December?

After a 50 basis point cut in reserve requirements in September, Pan Gongsheng, the Governor of the People's Bank of China, indicated, "We expect to further lower the reserve requirement ratio by 25 to 50 basis points towards the end of the year, depending on market liquidity conditions."

As the year draws to a close, calls for a reserve requirement cut are increasing

Particularly after the central bank made a minor extension of medium-term lending facility operations on November 25, many viewpoints suggest that the likelihood of a reserve requirement cut is rising.

Wu Chaoming, Chief Economist at Foresight Financial Holdings, remarked that a reserve requirement cut in December is plausible, and that its implementation either before or after the Central Economic Work Conference cannot be ruled outOn one hand, a supportive monetary policy is needed to ensure the steady recovery of the economy; on the other hand, it is necessary to coordinate with incremental fiscal policies to alleviate banks' capital and interest margin constraints while offsetting liquidity gaps caused by the expiration of a substantial amount of MLF.

Moreover, the yuan has once again dipped below 7.3 against the US dollar, marking this year's second occurrence of such a drop.

On December 3, the offshore yuan continuously slid below 7.29, 7.30, and 7.31 against the dollar after the market opened, reaching a low of 7.3141, which marks the lowest point of the year

Similarly, the onshore yuan also depreciated, coming within 25 basis points of 7.3 at one point during the day.

However, in the following trading days, the yuan staged a rebound against the dollarBy December 7, both the onshore and offshore yuan had risen back to the 7.25 range against the dollar.

The yuan’s exchange rate has become more flexibleThis flexibility will enhance the exchange rate's role as an automatic stabilizer for adjusting macroeconomic conditions and managing international balance of payments.

Guan Tao, the global chief economist of Bank of China Securities, highlighted that the dual fluctuation of the yuan allows it to act as a "damper" against internal and external shocks

It is precisely because of exchange rate fluctuations that timely release of market pressure can occur, which prevents the accumulation of anticipationMore importantly, as the yuan’s exchange rate gains flexibility, fluctuations in capital flows may lessen reliance on foreign exchange controls, granting greater autonomy to monetary policy.

Korea Experiences Double Trouble in Stocks and Currency

Korea’s capital markets are consistently slumping, with the KOSPI on December 9 plunging sharply, currently down 2.17%. The KOSDAQ index suffered even more, registering a decline of over 4%. Simultaneously, the South Korean won depreciated by 0.4% against the dollar

This has persisted for four consecutive trading days, demonstrating investors' dwindling confidence in the country's market amid ongoing political crises.

The political turbulence in South Korea seems to have shaken investor confidence severelyThe continuous decline in both the Composite Index and the KOSDAQ has raised concerns among market strategists about the potential worst-case scenarios unfoldingLee Kyoung-Min, an analyst at Daishin Securities, emphasizes that even minimal developments could exacerbate the situation.

Market sentiment has turned distinctly negative due to accumulated fatigue, disappointment, and a precarious supply-demand balanceAny small news can sway the already volatile Composite Index significantly, leading to swirling uncertainties regarding the future of South Korea's financial landscape.