The attention on the People’s Bank of China’s loan prime rate (LPR) setting today was misplaced. These, the one- and five-year, were left unchanged as expected. The PBOC instead sent markets into a frenzy with two moves:

the Bank set the USD/CNY reference rate more than 700 points lower than the reported expected (see bullets above), smashing yuan shorts again

the Bank also eased its macro-prudential adjustment parameter, raising it to 1.5 from 1.25. The effect of this move is on bostering companies’ and financial institutions' cross-border financing, enabling more foreign capital inflows. The macro-prudential adjustment parameter is a multiplier that determines the upper limit of outstanding cross-border financing an institution can have.

Yuan rocketed stronger on the moves.

The Australian dollar gained strength on the moves also, AUD likes a strong yuan as it, in effect, gives more $ to China to buy Australian goods and services. AUD was also bolstered by another (in a long, long series) of solid employment reports. The unemployment rate fell in June to 3.5%, barely up from a 48 year low. If next week’s CPI report from Australia shows still strong inflation the health of the labour market will not stand in the way of the Reserve Bank of Australia hiking again, should they have the gumption. And yes, I am aware that the unemployment rate is a lagging indicator and that indications suggest that the unemployment rate will drift higher over the coming months … but I’ve been hearing that for a long, long time now. I guess eventually it’ll be right. Like inflation is transitory … eventually.

The USD weakened further pretty much across the majors board. EUR, NZD, CAD, GBP, CHF and even the yen all gained.

Asian equity markets:

  • Japan’s Nikkei 225 -1.1%

  • China’s Shanghai Composite -0.1%

  • Hong Kong’s Hang Seng +0.4%

  • South Korea’s KOSPI 0.0%

  • Australia’s S&P/ASX 200 +0.2%

usdcnh wrap chart pboc 20 July 2023