CNY could face more headwinds over the near term – HSBC

The People’s Bank of China (PBoC) unexpectedly reduced its key rates on 15 August – which drove USD/CNY to a fresh year-to-date high. Economists at HSBC analyze Yuan’s outlook.

PBoC may smooth volatility

The PBoC unexpectedly lowered the rate on its one-year loans, or medium-term lending facility (MLF), by 15 bps to 2.5%, together with a reduction of 10 bps in its 7-day reverse repurchase rate (a short-term policy rate) to 1.8%. The rate cut opens room for a reduction in 1-year or even 5-year loan prime rates on 21 August.

The CNY could face more headwinds from China’s persistent run of weak data and further widened yield disadvantage. 

The PBoC may continue to smooth volatility, but we do not expect it to draw a firm line in the sand when the tide keeps coming in.