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CNY: Rate cut to weigh on Yuan as depreciation pressure remains - ANZ

FXStreet (Delhi) – Khoon Goh, Senior FX Strategist at ANZ, suggests that the interest rate cuts in China have tended to lead to yuan depreciation and the failure of the yuan to gain from the ECB inspired risk rally is also another indication that near-term depreciation pressure remains.

Key Quotes

“The People’s Bank of China (PBoC) announced on Friday 23 October (after the market close) that the benchmark interest rates will be reduced by 25bps. In addition, the reserve requirement ratio (RRR) for commercial banks will be cut by 50bps to 17.5% (with larger cuts for selected banks). This is the fifth interest rate cut by the PBoC this year, and the sixth in the current easing cycle which began on 21 November last year. Our China economists see further interest rate and RRR cuts as still possible.”

“Despite an easing in capital outflows in October, there is still genuine onshore demand for dollars. The latest rate cut may see some pick-up in outflows.”

“Prior to the rate cut announcement, the yuan has been under downward pressure, despite the positive risk rally that was inspired by ECB President Draghi’s comments that that he is looking at providing more easing, as early as the December meeting.”

“While some in the market sees an interest rate cut by the PBoC as positive for risk, the offshore CNH spot weakened after the rate cut was announced. CNH was trading at 6.3884 against the USD when the news came out, and closed at 6.3964 for a loss of 0.13%.”

“The CNH’s reaction is not surprising. Looking at the seven previous interest rate cuts, we find that the CNH tends to weaken by an average of 0.1% on the day of the announcement (or the following Monday if the announcement was made over the weekend). Hence, the move seen in CNH is entirely consistent with past reactions. But how CNH fares over the coming weeks following an interest rate cut varies.”

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