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CNH Falters On Unexpected MLF Cut

CNH

USD/CNH has spiked on the 1 yr MLF rate cut. The pair is pushing back above 6.7500 at the time of writing, close to +0.25% above the NY closing level from last week. The 1 yr MLF rate has fallen to 2.75%, versus an unchanged 2.85% expected by the market, while the 7-day reverse repo rate was also cut by the same amount.

  • The market reaction is not surprising given no economists surveyed by Bloomberg forecast the move. The authorities did withdraw some liquidity as well.
  • This highlights the delicate balance act the authorities face, with ample liquidity in domestic market markets but weaker credit demand (Friday's data for July highlighted this in terms of aggregate finance and new loans).
  • The authorities will be looking to underpin the recovery with today's move.
  • From a USD/CNH standpoint the risks will likely be skewed higher, given relative monetary policy divergences. At least until we get greater clarity around Fed projections.
  • Note the 50-day MA comes in at 6.7295 so that should act as reasonable support on the downside, while on the topside, 6.7700/6.7900 could be where we gravitate to.
  • From a rates standpoint the next focus point will be the 1yr and 5yr loan prime rates, which get announced next Monday.

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