02 December 2014
Sales Trader, Client Trading Services, Saxo Capital Markets
China interest rate cut sparks rumours of further drops. Will the People’s Bank of China step up monetary easing and drive the renminbi lower?
The People's Bank of China (PBoC) caught investors off guard in November when it announced it would cut its one-year benchmark lending rate to 5.6%, whilst also slashing its one year deposit rate.
China is expected to grow by 7.3% in Q3, its lowest level for five years. Amid concerns that the economy in China is weakening, it seems the PBoC has taken steps to weaken the domestic currency and fuel export growth across the nation.
Driving a currency lower is not something that is uncommon for economies looking to work their way out of trouble. It has been and still is evident in Japan, and in more recent times is something that is being pushed by Mario Draghi's European Central Bank. Renminbi weakness
The Chinese renminbi had fallen approximately 10% against the USD even before the rate cuts. CNH, the offshore and thus more internationally traded version of Chinese renminbi, inevitably moved lower upon the November announcement. Hovering around the 6.12 level, USD/CNH moved towards the 6.17 area, ultimately reaching a high of 6.1684 on November 28. The move also had wider implications for financial markets:
- AUD, NZD and CAD all enjoyed buoyancy after the decision by the Chinese central bank.
- Oil, metals and agricultural commodities were all perceived to be more in demand after the rate drop.
- AUD/USD jumped towards the .8700 mark upon the news.
It is likely that this first step in monetary easing may not be the last. Reaction to the move from the markets worldwide was rife with speculation that banks in China would not quite do enough to lower their lending rates. USD/CNH may break through its recent highs if USD strength continues and further PBoC easing takes place. News that Asia's largest economy is beginning to ease policy has provided some short-term support for commodity currencies like CAD, NZD and AUD after falling sharply against the USD this year. Photo: Shutterstock.What this means for traders?
Investors looking to trade China's future central policy could look at pairs offered including the offshore renminbi; UD/CNH, EUR/CNH or AUD/CNH. If further PBoC easing takes place we could see USD/CNH may break through its recent highs. On the other hand, if China fails to provide additional support to Chinese banks in the form of further rate cuts, we could see a reversal in the USD/CNH pair towards 6.00. Either way, renminbi traders will be tracking the central bank's actions closely as we head into 2015.
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