The move looks surprising at first sight, as market participants would expect upcoming US – China phase one trade deal signature along with a partial tariffs rollback to ease tensions between both nations, a trend that should ultimately support economic activity. Yet the People’s Bank of China decisions to cut its seven-day reverse repo rate to 2.50% (prior: 2.55%) for the first time in four years after taking similar measures on both the one-year medium-term lending facility rate two weeks ago and the one-year loan prime rate earlier in August and September seem to confirm the worst.
Both sides remain highly careful when commenting the latter while expectations of a final signature of the trade agreement have already been postponed from November to December 2019 amid details of the arrangement concerning the commitment on US agricultural product purchases and a potential tariff rollback (probably minimal if effective).
The latest PBoC rate decision does not appear to change much on the USD/CNY front, maintained slightly above fixing at 7.0037 (USD/CNY: 7.0140) as last Saturday ministerial talks did not appear conclusive.
On the data front, the slowdown in domestic consumption continues to be felt, with retail sales and fixed asset investments in October at a bottom of 7.20% (prior: 7.80%) and 5.20% (prior: 5.40%) respectively while industrial production downward bias confirms downside risk on the Chinese economy.
There is certainly good reasons to consider that further easing from the PBoC and particularly on the predominant benchmark prime loan rate is on its way, although the timing and scale is likely to depend on the outcome of the current trade deal and whether additional tariffs on $156 billion Chinese imported products, still due for 15 December 2019, would be implemented. In this context, USD/CNY is not expected to stay still much longer.
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