Week in FX Asia – China's Surprise Rate Cut Jolts Currency Markets

• People’s Bank of China cuts rate to 5.6%
• Japan’s parliament is dissolved and tax hike on paused

The Chinese central bank made headlines on Friday morning with a surprise rate cut designed to avoid falling short of its growth target this year. The People’s Bank of China (PBoC) had tried smaller stimulus packages earlier this year with limited success. Beijing started a campaign about China falling short of its projected 7.5% growth this year, and that all things considered, it would not be a disaster to the global economy. That is why the market was caught offside by the PBoC’s announcement

China unexpectedly cut its benchmark interest rates for the first time in more than two years this morning to lower borrowing costs and lift a cooling economy that is on track for its slackest annual growth in over two decades. The PBoC will slash one-year benchmark lending rates by 40 basis points to +5.6%, and one-year benchmark deposit rates would be lowered by 25 basis points, it said, adding that the reductions would be effective on November 22.

The PBoC also looked to liberalize deposit rates to allow Chinese banks to pay 1.2 times the benchmark level, a modest but significant increase from 1.1 times previously. The initial market reaction has given commodity-sensitive currencies a real boost, especially AUD ($0.8705), NZD ($0.7923), and CAD ($1.1282).

Speaking of surprise actions by Asian central banks, the Bank of Japan (BoJ) made shockwaves last month when it announced an unexpected an expansion of its quantitative easing program. The move was prompted by a slowdown in inflation and growth after the introduction of a controversial sales tax hike last April. Now Japanese Prime Minister Shinzo Abe has dissolved parliament and effectively put the next phase of the sales tax rise on hold.

The USD/JPY continues to rise higher as the yen depreciates even more than the Japanese government would like it to Japanese government would like it to. The currency floated briefly above ¥118 only to retreat slightly beneath that price level. Rate divergence continues to drive FX prices as two central banks, the U.S. Federal Reserve and the Bank of England, make strong cases for rate hikes next year versus the BoJ, European Central Bank, and now the PBoC that need to keep rates low to stimulate their economies.

Next Week for Asia

BoJ Governor Haruhiko Kuroda will grab most of the attention from his planned speeches on Monday. He is scheduled to speak at a meeting with business leaders in Nagoya and at the Paris Europlace International Financial Forum in Tokyo. The governor is not expected to stray too far from the BoJ’s official rhetoric from last week’s monetary policy meet. Meanwhile, a German Ifo business confidence survey due on November 24 should be capable of keeping the EUR moving.

The market will try and engage with the minimum of interest in U.S. preliminary gross domestic product (GDP) figures on November 25, and U.K. quarter-over-quarter GDP data on November 26. No one wants to have too much strapped on as the U.S. begins to celebrate Thanksgiving, the largest and most traveled holiday period in the American calendar. Historically, FX volumes plummet over the two-day festivities (it’s a financial half day, but most make it a long weekend). Be aware that the Organization of Petroleum Exporting Countries happens to have an all-day meeting scheduled for the same day — could the ministers surprise the crude oil market?