The People’s Bank of China has cut the one-year loan prime rate (LPR) by five basis points to 4.2%. Here’s what Iris Pang – Greater China Economist at ING – thinks this move means for the yuan.
“We think that the move was a result of the very weak August activity data, especially fixed asset investments and industrial production. Another cut is expected in October unless we see a very encouraging outcome from the trade talks, which is unlikely. We don’t expect this cut to move the yuan.”
“A rate cut doesn’t necessarily mean a weaker yuan. There is very little arbitrage opportunity given that China’s capital account is not fully open. Put simply, the theory that lower interest rates weaken the currency doesn’t apply in China.”
“USD/CNY peaked at 7.1054 on Thursday then closed at 7.0965. After the rate cut today, the USD/CNY moved to 7.0903. That is, the yuan actually strengthened rather than weakened.”
“We expect a weaker yuan if the trade talks go poorly. Our USD/CNY forecast is 7.20 by the end of 2019.”