China’s State Council meeting on 7 July opens the door for a possible targeted RRR cut in the near-term. Economists at HSBC believe the divergent monetary policy between China and the US has been a new normal. A narrower CNY yield advantage in 2021 is a key reason to expect USD/CNY to gradually be higher in the second half of the year.

A targeted RRR cut, if delivered, may not trigger significant CNY weakness

“This is the first time in more than a year since the State Council mentioned using RRR cuts as one of the monetary policy tools. In our economists’ view, this opens a door for a possible RRR cut in the coming months, if not weeks, and it is more likely that the cut is a targeted one with the aim of supporting small businesses. We also expect its impact on overall liquidity conditions and credit growth to be limited, while the People’s Bank of China’s (PBoC) policy stance is still to strike a balance between growth and leverage stabilisation.”

“A narrower CNY yield advantage in 2021 is a key reason behind our view that USD/CNY will gradually trade higher in 2H. However, the absolute yield advantage of the CNY is still high at the moment. Hence, if markets start to price in a more accommodative stance of the PBoC or when a (targeted) RRR cut is delivered, it may not trigger significant CNY weakness. Rather, it should serve to slow down the CNY's outperformance.”

“A higher USD/CNY has played into our thinking that the broad USD should begin to bottom in the months ahead. After all, the CNY’s performance is a key determinant of the broad USD overall. Our long-standing view has focused on the actual start of the Federal Reserve’s (Fed) tapering being supportive for the USD, especially those major central banks that could be expanding their balance sheets in contrast to the Fed or are having monetary policy shifting in a different direction.”


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex News

Latest Forex News

Editors’ Picks

EUR/USD battles with 1.1700 as the market mood turns sour

Poor German data and renewed concerns about a default of the Chinese Evergrande property giant undermined investors’ sentiment, pushing them into the dollar’s safety.


GBP/USD accelerates its slump, trades around 1.3650

GBP/USD is under strong selling pressure, trimming most of its post-BOE gains. Concerns about the global financial health and slow moves towards tapering weigh on markets.


XAU/USD hangs near multi-week lows, around $1,745 ahead of Powell

Gold struggled to capitalize on its attempted intraday recovery move. Hawkish Fed/BoE, rising bond yields acted as a headwind for the metal. Resurgent USD demand exerted additional pressure on the commodity.

Gold News

PBoC imposes ban on crypto trading as it fosters ‘illegal financial activity’

PBoC bans crypto trading activities and a plethora of associated services, labeling it “illegal.” Overseas cryptocurrency exchanges providing services to Chinese residents will be investigated in accordance with the law. 

Read more

Evergrande, VIX and yields make for choppy day ahead

Equity markets remain focused on Evergrande as rumours of a possible default on overseas debt swirl. The market appears to be on the hunt for negative news, which leads us to conclude that stocks are going lower in the short term.

Read more