ForexLive Asia-Pacific FX news wrap: Two moves from the PBOC sent the yuan surging

The
attention on the People’s Bank of China’s loan prime rate (LPR)
setting today was misplaced. These, the one- and five-year, were left
unchanged as expected. The PBOC instead sent markets into a frenzy
with two moves:

the
Bank set the USD/CNY reference rate more than 700 points lower than
the reported expected (see bullets above), smashing yuan shorts again

the
Bank also eased its macro-prudential adjustment parameter, raising it
to 1.5 from 1.25. The effect of this move is on bostering companies’
and financial institutions’ cross-border financing, enabling more
foreign capital inflows. The macro-prudential adjustment parameter is
a multiplier that determines the upper limit of outstanding
cross-border financing an institution can have.

Yuan
rocketed stronger on the moves.

The
Australian dollar gained strength on the moves also, AUD likes a
strong yuan as it, in effect, gives more $ to China to buy Australian
goods and services. AUD was also bolstered by another (in a long,
long series) of solid employment reports. The unemployment rate fell
in June to 3.5%, barely up from a 48 year low. If next week’s CPI
report from Australia shows still strong inflation the health of the
labour market will not stand in the way of the Reserve Bank of
Australia hiking again, should they have the gumption. And yes, I am
aware that the unemployment rate is a lagging indicator and that
indications suggest that the unemployment rate will drift higher over
the coming months … but I’ve been hearing that for a long, long
time now. I guess eventually it’ll be right. Like inflation is
transitory … eventually.

The
USD weakened further pretty much across the majors board. EUR, NZD,
CAD, GBP, CHF and even the yen all gained.

Asian
equity markets:

• Japan’s
  Nikkei 225 -1.1%

• China’s
  Shanghai Composite -0.1%

• Hong
  Kong’s Hang Seng +0.4%

• South
  Korea’s KOSPI 0.0%

• Australia’s
  S&P/ASX 200 +0.2%