The People’s Bank of China unexpectedly reduced its main rate, the 7-day reverse repo rate, by 10 basis points to 1.7% last night. This is the first rate cut since August last year, according to Commerzbank currency strategist Folkmar Baur.
The market is set to ignore negative scenarios
«The impact of credit and monetary policy on the currency is less pronounced than on other currencies due to the existing capital controls and the peculiarities of the Chinese economy. However, the reduction in the benchmark rate has a certain signaling effect.
Short-term impulses were never expected from the Third Plenum, which concluded last week. This meeting is always dedicated to long-term events and reforms. Although the initial communique was somewhat disappointing, the more detailed documents published over the weekend provide more hope for constructive reforms, such as fiscal policy.
The signal of support from the People’s Bank of China is very important in the near future, especially against the backdrop of weak growth indicators in the second quarter. The official meeting of the Politburo will take place this week, so signals about further support measures can be expected. I believe that the market will be able to discount more negative scenarios of pronounced growth slowdown, which should support the yuan.»