Frances Cheung, head of macro strategy at Westpac, notes that USD/CNY and USD/CNH have ground higher in the past week, with the next resistance for USD/CNH at 7.10.
“China reformed its lending rate formation mechanism, resulting in an effective 6bp cut in the PBoC’s 1-year LPR (Loan prime rate). As the rate cut was timid and well within market expectations, that had not led to any material market reaction.”
“Still, the new formation mechanism has started, with the significance being that there will be a more effective transmission from monetary policy – in particular via an adjustment in the MLF (medium-term lending facility) rate – onto bank loans and credits.”
“Separately, there are media reports that the government is considering further raising the quota for special LGBs (local government bonds) to support infrastructure projects. From the pace of issuance so far this year, we reckon there is an upsize potential of RMB0.6-0.8trn of supply.”
“With our expected weakness in the EUR – a heavy weight in the RMB basket – and general weakness in Asian currencies, this outlook for the RMB basket requires some adjustment against the dollar. We expect USD/CNY to edge up to 7.20 by year end, while USD/CNH can be mildly higher.”
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