A little after the Asian market close Friday night, the People’s Bank of China announced a 40bp drop in the 1-year lending rate, along with a 25bp drop in the 1-year deposit rate. This is the first time lending rates have fallen since July 2012.
The impact was felt largely in currency markets initially, with the Aussie dollar talking to a high of 0.8720 before closing lower at 0.8660.
Westpac currency strategist Jonathan Cavanagh has put out out a note to clients this morning talking about the impact of the Chinese move both on the economy and currency markets.
He’s cautious about the impact on the Chinese economy because “despite the cut in rates by the Chinese authorities, the PBoC still noted that it was maintaining a prudent stance towards monetary policy”.
But he added that expectations are now for more easing, “a number of market participants are now expecting additional easing measures over the coming months, including scope for RRR cuts.
“Hence, even if the moves from last Friday are not enough to help improve Chinese economic momentum, this is only likely to increase the market’s confidence that additional easing steps will be undertaken. Our China data pulse (see WSURCNP on Bloomberg) finished last week just below 20%, which leaves us with plenty of scope for a rebound towards the end of this year and into the early part of 2015.”
For the Aussie dollar, Cavanagh said: “Our basic thesis is that the move should help stabilise sentiment towards commodity currencies within the region.”
But given the dynamics of the USD at the moment, he beetles it safest to play the Aussie on the crosses “against EUR and JPY rather than against the USD”.
Westpac has suggested for some time that Australia’s interest rate pick-up will buoy the Aussie and drive it higher over the next 6 months.
Friday’s PBOC move seems to support that.