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Offshore Yuan Inches Higher, PBOC Slash LPRs

CNH

Spot USD/CNH has ground lower, piercing yesterday's low in the process, and last trades -32 pips at CNH6.3479. Bears see Jan 18/Dec 31 lows of CNH6.3405/6.3379 as their initial target and a break here would clear the way to Dec 8 low of CNH6.3305. On the flip side, a rebound above Jan 6/Nov 26 highs of CNH6.3976/99 would give bulls some reprieve.

  • The PBOC trimmed the 1-Year Loan Prime Rate by 10bp and the 5-Year Loan Prime Rate by 5bp, while Bloomberg consensus forecast pointed to each being cut by 10bp. The latest round of policy easing came on the heels of 10bp cuts to interest rates applied to 1-Year MLF & 7-Day Reverse Repo operations earlier this week. For context, it is worth noting that 1-Year LPR typically moves in sync with 1-Year MLF rate, while 5-Year LPR is used as a reference for long-term loans including mortgages.
  • The prospect of rate cuts had been touted by China's securities newspapers before they came to fruition. China Securities Journal added that the PBOC are expected to lower the RRR as soon as in 1Q2022.
  • China's central bank also set their USD/CNY reference rate at CNY6.3485, the lowest level since May 2018. Some may interpret such a strong fixing as a sign that the PBOC are comfortable with further redback appreciation. The fixing fell in close proximity to average sell-side estimate of CNY6.3478.

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