PBoC Boosts Liquidity via Cut in 14-Day Reverse Repo Rate

PBoC Boosts Liquidity via Cut in 14-Day Reverse Repo Rate
December 19, 2019


The US dollar rose 0.08% against the Chinese yuan to trade at 7.0023 on Wednesday after the People’s Bank of China (PBoC) slashed its 14-day reverse repurchase rate, after slashing the short-term 7-day repo rate a month ago.

China’s central bank lowered the 14-day reverse repo agreement rate to 2.65% from 2.7%. The central bank also increased the liquidity in the financial system by yuan 200 billion through reverse repurchase contracts.

In November, the central bank slashed the seven-day repurchase rate to 2.50% from 2.55%, the first rate reduction since October 2015. Ironically, the rate cut has come at a time when the interbank rates usually go up due to seasonal increase in liquidity demand, as per Julian Evans-Pritchard, an economist at Capital Economics.

The central stated that it would continue to monitor the liquidity conditions and implement necessary changes in the open market to ensure stable liquidity. The central bank said, “The PBOC will continue to pay close attention to liquidity conditions and flexibly conduct open market operations to keep the year-end liquidity steady.”

Some market participants pointed out that the quantum of liquidity offered by PBoC was more than anticipations of the market, considering the ample liquidity which is already there.

Even though a five basis point rate cut is not considered significant, it is an indication that the PBoC is following an easing strategy. However, according to the economist, this may encourage banks to reduce Loan Prime Rate (benchmark rate for loans) by 5 basis points this Friday.

The economist further stated that more easing might be required to ensure stable credit growth and avoid the weakening of economic activity.

Traders opined that the rate cut was anticipated as it maintains the yield curve without any change. Some economists noted that this could pave the way for further easing as economic growth declines.

With this move, the PBoC increased liquidity by yuan 200 billion through reverse bond repurchase contracts.  Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong, stated earlier this week that the central bank of China would probably embrace a flexible monetary stance next year.

In a note to clients, Liu said, “We expect monetary policy to play a bigger role in 2020 given the limited fiscal impulse. However, cuts to de facto policy rates – i.e., the medium-term lending facility (MLF) and open market operation (OMO) rates – are likely to be slow and shallow for both fundamental and technical reasons.”

Liu anticipates the PBoC to slash MLF rates steadily in slabs of five basis points every time in the upcoming future.

Reverse Repos and MLFs are perceived as PBoC’s important tools to handle short and long-term liquidity in the banking system. The MLF is now used as the basis for deciding China’s benchmark lending rate or the Loan Prime Rate (LPR), whose monthly fix is to be determined tomorrow. In this regard, Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore, opined that the central bank of China might “just enough to convince banks to make another five basis points cut this Friday to the LPR. We think the pace of easing will pick up next year, when we expect 50 basis points worth of cuts. While policymakers are reluctant to engineer a sharp rebound in credit growth, more easing will probably be needed just to keep credit growth broadly stable and prevent economic activity from weakening too quickly.”

The rate cut is expected to keep the Chinese yuan bearish in the short-term.

Technically, the USD/CNY pair has received strong support at 6.9950 levels. The stochastic oscillator is in the oversold region. Therefore, we can anticipate the currency pair to move up in the short-term.

cny - technical analysis - 19th Dec 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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