Monday, October 26, 2015

China: Double cut once more - Nomura

FXStreet (Bali) - As Nomura Asian Economic Team notes, PBOC lowered its rate and RRR last Friday to stabilise growth momentum and avoid deflation, adding that given the risk of further rate and RRR cuts ahead, further RMB depreciation is expected and look for USD/CNY at 6.50 by end-2015.

Key Quotes

"The PBOC announced its decision to cut benchmark interest rates (either deposits or loans) by 25 basis points and the RRR (required reserve ratio) by 50 basis points, effective on 24 October. Meanwhile, the PBOC is removing the cap on deposit interest rates. However, the interest rate for personal housing provident fund loans was left unchanged. After this move, the benchmark 1-year deposit rate will be 1.5% and the 1-year loan rate 4.35%, while the RRR will be 17.5%."

"For RMB, we view the surprise rate and RRR cut as negative as the new FX fixing regime should allow for more alignment of interest rate and FX policy. Given the risk of further rate and RRR cuts ahead and sustained medium-term growth concerns, we continue to forecast RMB depreciation and look for USD/CNY at 6.50 by end-2015. Key in the near term is the 6.40 level on onshore spot, which is perceived to be an important level for judging whether the authorities’ FX stance has changed. However, whether our forecast of 6.50 will be achieved also depends on other factors, such as the timing of China’s SDR announcement and whether there is a shift in FX policy afterwards, but also local and global macroeconomic and policy developments."

"The near-term risks to our view of RMB depreciation include consistent PBOC FX USD selling intervention and growth developments such as a stabilisation in Q4 growth. However, we believe this is now consensus and highlights some asymmetric risks if data turn out to be weaker than expected. The same is true for the IMF SDR announcement, where the market is strongly of the view that China will win entry in November."
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