China cut its one-year loan prime rate (LPR) to 3.65% from 3.7% and the five-year LPR to 4.30% from 4.45% on Monday. The cuts to LPRs were widely ex
China
cut its
one-year
loan prime rate (LPR) to 3.65% from 3.7% and the five-year LPR to
4.30% from 4.45% on Monday.
The
cuts to LPRs were widely expected. A 10bp cut to the 1-year was the
consensus expected, not the 5bp cut delivered. A 10bp cut to the
5-year was the consensus expected, not the 15bp cut delivered.
The
larger cut to the longer-term rate seems to be based on two reasons.
One, the five-year rate is that used more widely for mortgage-based
lending. With China’s distressed property market a larger than
expected cut looks likely aimed at improving borrower confidence.
On
the one-year cut, smaller than expected, a key PBOC concern is
capital flight out of the yuan and into foreign currencies. For
example, if the Federal Reserve is hiking rates and the PBOC is
cutting, wouldn’t it make sense to move capital into USD and out of
yuan? Its not rocket science. A smaller cut to the shorter term rate
makes capital flight slightly less likely, at the margin.
On
the currency, the PBOC cut
the
onshore yuan’s
fixing to its
weakest
(for
the CNY) since
September
2020, but
again not weakening it as much as was the expected.
Chinese rate cuts served to support local equities and China -proxy trades, such as AUD.
AUD/JPY was a mover today. AUD/USD added on points to trade, briefly,
above 0.6900. USD/JPY rallied too, moving above 137.40. The combined
impact saw AUD/JPY higher on the session.
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