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2 Mar 2015
Market implications from the China rate cut - Westpac
FXStreet (Bali) - The surprising PBOC rate cut over the weekend, according to Westpac's FX Strategist Jonathan Cavenagh, should reinforce the upside bias in USD/CNY/CNH.
Key Quotes
"The first and most obvious implication from the move is that it should reinforce the upside bias in USD/CNY/CNH. The last interest rate cut was delivered in November of last year and on the day it took effect (the 24th), USD/CNH rose 0.41% (6.1341 to 6.1591), while onshore spot rose by just under 0.30%. The rate cut is a clear desire to ease financial conditions and hence the authorities will be less willing to tolerate currency outperformance on a NEER/REER basis."
"This fits with the trend in the USD/CNY fixing bias that we saw last week, which was clearly skewed towards the upside. This trend is likely to continue for a number of weeks, as the authorities look to maintain/improve competitiveness as part of broader effort to improve financial conditions. As the USD/CNY fixing bias trends higher this will allow onshore spot to gravitate higher, which will naturally lead to higher levels in USD/CNH. A move through 6.3000 seems likely and it may well be that we don’t see meaningful selling interest until we reach the 6.3200 level."
"The rate cut will support local equity market sentiment but Chinese equities tend not to have a great correlation with other regional bourses. So we suspect there will be only limited positive ‘spillovers’ to over markets."
"Any positive impetus to broader sentiment in EM Asia is likely to be capped by the fact that the Chinese authorities indicated that this move does not represent a shift away from prudent monetary policy. Having said that, our China economist noted that further rate cuts would be likely as the authorities look to lower real lending rates and push nominal GDP back towards its implied target."
Key Quotes
"The first and most obvious implication from the move is that it should reinforce the upside bias in USD/CNY/CNH. The last interest rate cut was delivered in November of last year and on the day it took effect (the 24th), USD/CNH rose 0.41% (6.1341 to 6.1591), while onshore spot rose by just under 0.30%. The rate cut is a clear desire to ease financial conditions and hence the authorities will be less willing to tolerate currency outperformance on a NEER/REER basis."
"This fits with the trend in the USD/CNY fixing bias that we saw last week, which was clearly skewed towards the upside. This trend is likely to continue for a number of weeks, as the authorities look to maintain/improve competitiveness as part of broader effort to improve financial conditions. As the USD/CNY fixing bias trends higher this will allow onshore spot to gravitate higher, which will naturally lead to higher levels in USD/CNH. A move through 6.3000 seems likely and it may well be that we don’t see meaningful selling interest until we reach the 6.3200 level."
"The rate cut will support local equity market sentiment but Chinese equities tend not to have a great correlation with other regional bourses. So we suspect there will be only limited positive ‘spillovers’ to over markets."
"Any positive impetus to broader sentiment in EM Asia is likely to be capped by the fact that the Chinese authorities indicated that this move does not represent a shift away from prudent monetary policy. Having said that, our China economist noted that further rate cuts would be likely as the authorities look to lower real lending rates and push nominal GDP back towards its implied target."