The People's Bank of China (PBoC) unexpectedly cut its benchmark rate, the 7-day reverse repo rate, by 10 basis points to 1.7% last night, the first rate cut since August last year, Commerzbank’s FX strategist Volkmar Baur notes.

The market is set to ignore negative scenarios

“The impact of monetary policy in general and the policy rate in particular on the currency is less pronounced than on other currencies due to the existing capital controls and the structure of the Chinese economy, it can still have an indirect impact. This is because lowering the policy rate has a certain signaling effect.”

“Short-term impulses were never expected from the Third Plenum, which ended last week. This meeting is always about longer-term developments and reforms. And while the initial communique was somewhat disappointing, the more detailed documents released over the weekend offer a bit more hope for a number of constructive reforms, for example in fiscal policy.”

“So, the signal of near-term support from PBoC is important, especially in light of the weak Q2 growth numbers. The Politburo officially meets this week, so signals for further support measures could also come out of this meeting. I would expect the market will be able to discount more negative scenarios of a more pronounced growth slowdown, which should help the CNY.”