China Seen Holding Benchmark Rate Steady in Aug, but Weak Data Fans Rate Cut Talk

Twenty-five traders and analysts, or 78% of 32 participants, in the snap poll predicted no change in either the one-year Loan Prime Rate (LPR) or the five-year tenor.

The remaining seven respondents all expected a cut to the one-year LPR, with six participants predicting a 5 basis points (bps) reduction and one seeing a 10 bps cut.

None expected changes to the five-year tenor — which influences the pricing of mortgages, an area where authorities are keeping a tighter grip to curb rising home prices.

The one-year LPR is currently at 3.85%, and the five-year rate is 4.65%.

Official data this week showed China’s factory output and retail sales growth slowed sharply in July as new COVID-19 outbreaks and floods disrupted business operations, and some analysts believe August readings could be worse.

The People’s Bank of China (PBOC) injected billions of yuan through medium-term loans into the financial system earlier this week, which many market participants interpreted as an effort to prop up activity, although the cost of such borrowing was left unchanged.

The interest rate on the medium-term lending facility (MLF), which serves as a guide for the LPR, has been unchanged for 16 straight months, though the central bank has plenty of other tools it could use to bring down borrowing costs. It cut banks’ reserve requirements (RRR) in July, and many market watchers see another such cut in coming months.

Policy insiders told Reuters earlier in August that China is poised to quicken spending on infrastructure projects while the central bank supports the economy in other ways.

However, some survey participants believe there is urgency to roll out more easing measures, such as a rate cut, to reduce the risk of a sharper economic slowdown in coming months.

Liu Li-Gang, chief China economist at Citi, said the central bank would likely offer some easing signals but be cautious about taking any actions in the remainder of the year.

“Speaking of monetary policy signals, followed by a broad-based reserve requirement ratio (RRR) cut, another interest rate cut could mean aggressive easing, which is not in line with central bank’s recent statement of maintaining prudent monetary policy,” Liu said.

“From the market’s perspective, recent economic data came in below expectations. But compared with the government’s annual GDP target of 6% or above, the economy remained in a normal functioning range. An annual 8% growth (rate) is way above the target. It’s a mismatch between expectations, and there’s no risks of (the recovery) derailing.”

Liu did not see a big chance of a cut to either the MLF rate or LPR this year.

The LPR is a lending reference rate set monthly by 18 banks.

All 32 responses in the survey were collected from selected participants on a private messaging platform.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Reuters fixed income team, Writing by Winni Zhou; Editing by Kim Coghill)

The Weekly Wrap – The FED Delivers, Offsetting Market Concerns over COVID-19…

The Stats

It was a relatively busy week on the economic calendar, in the week ending 19th June.

A total of 60 stats were monitored, following the 48 stats from the week prior.

Of the 60 stats, 24 came in ahead forecasts, with 29 economic indicators coming up short of forecast. Just 7 stats were in line with forecasts in the week.

Looking at the numbers, 36 of the stats reflected an upward trend from previous figures. Of the remaining 24, 18 stats reflected a deterioration from previous.

For the Greenback, it was a 2nd consecutive weekly gain that came off the back of 3 consecutive weeks in the red. A Friday rebound reversed losses from early in the week. The U.S Dollar Spot Index rose by 0.31%, to end the week at 97.623. In the week prior, the Dollar had risen by 0.39%.

Following the previous week’s negative outlook towards economic recovery, it was COVID-19 that tested risk appetite.

Reports of spikes in new COVID-19 cases in recently reopened U.S states spooked the markets in the week.

There had also been a spike in Beijing before reportedly being brought under control.

While COVID-19 concerns lingered, the FED delivered further support at the start of the week. The move provided support to riskier assets but not enough to deliver commodity currencies a week in the green.

Looking at the latest coronavirus numbers.

The total number of coronavirus cases stood at 8,757,734 on Friday, rising from last Friday’s 7,718,680 total cases. Week-on-week, the total number of new cases were up by 1,039,054, on a global basis. This was higher than the previous week’s increase of 895,000 in new cases.

In the U.S, the total rose by 181,871 to 2,297,190. In the week prior, the total number of new cases had risen by 162,643. On Friday, 39,586 new cases had been reported, which was the largest daily increase since a 56,348 spike on 7th May.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 7,481 to bring total infections to 713,845. In the previous week, the total number of new cases had risen by 5,842

Out of the U.S

It was a relatively busy week on the economic data front.

Key stats in the week included May’s retail sales, June’s Philly FED Manufacturing PMIs, and the weekly jobless claims figures.

Retail sales bounced back in May, with a 17.7% jump reversing a 16.4% slump from April. Also impressive was the rebound in the manufacturing sector in June. The Philly FED Manufacturing PMI jumped from -43.1 to 27.5.

On the negative, however, were the jobless claims figures. In the week ending 12th June, initial jobless claims rose by 1.508m, following a 1.566m rise in the previous week. Economists had forecast a 1.3m rise.

Other stats in the week included NY State manufacturing figures, industrial production, business inventories, and housing sector numbers. There was little influence, however. Better manufacturing numbers from Philly and NY State muted the impact of a modest 1.4% rise in industrial production.

On the monetary policy front, there was plenty of action. FED Chair Powell testified to lawmakers on Tuesday and Wednesday. The testimony came off the back of another move by the FED on Monday. Riskier assets got a boost from a $250bn FED move into individual corporate bonds.

In the equity markets, the NASDAQ rallied by 3.73%, with the Dow and S&P500 gaining 1.04% and 1.86% respectively.

Out of the UK

It was a particularly busy week on the economic calendar. Employment figures for May tested the Pound on Tuesday, with claimant counts jumping by another 528,900.

Following a 1,032,000 surge in April, an easing of lockdown measures failed to reverse the trend. While April’s unemployment rate held steady at 3.9%, it’s unlikely to stay there…

On Friday, retail sales bounced back in May, though it wasn’t a complete reversal of April’s slump.

Month-on-month, retail sales jumped by 12%, partially reversing a 22.7% slump in the previous month.

Inflation figures for May had a muted impact on the Pound, despite an easing of inflationary pressures. The annual rate of inflation softened from 0.8% to 0.5%.

For the Pound, the main event of the week was the BoE monetary policy decision on Thursday, however.

While unanimously holding interest rates unchanged at 0.1%, the BoE increased its QE by £100bn to £725bn. The markets may have been in search of something more sizeable when considering recent moves by others…

On the Brexit front, there was nothing positive to shift sentiment to something more concrete than hope. The Key news was an agreement between the EU and Britain not to extend the transition period.

In the week, the Pound fell by 1.52% to $1.2350, following on from a 1.01% loss in the previous week. The FTSE100 ended the week up by 3.07%.

Out of the Eurozone

It was a relatively busy week economic data front.

Key stats included Germany and the Eurozone’s ZEW Economic Sentiment figures for June.

Both saw an uptick, as economists and analysts continued to see a brighter outlook.

It wasn’t enough to deliver a week in the green, however, as concerns over COVID-19 weighed.

Other stats in the week included the Eurozone’s finalized inflation figures for May, 2nd quarter wage growth, and trade data for April. There was little interest in the numbers, however.

For the week, the EUR fell by 0.69% to $1.1178, following a 0.32% decline from the previous week.

For the European major indexes, it was a relatively bullish week. The CAC40 and DAX30 rose by 2.90% and 3.19% respectively, with the EuroStoxx600 gaining by 3.22%.


It was another bearish week for the Aussie Dollar and the Kiwi Dollar. A 2nd consecutive week in the red came off the back of a run of 3 consecutive weekly gains.

In the week ending 19th June, the Aussie Dollar fell by 0.45% to $0.6835, with the Kiwi Dollar declining by 0.59% to $0.6407.

For the Aussie Dollar

It was a relatively quiet week on the economic data front.

The markets had to wait until Thursday for May employment figures that were the key stat of the week.

It wasn’t good news for the Aussie Dollar. In May, employment slid by 227.7k, following a 594.3k slump in April. The unemployment rate jumped from 6.2% to 7.1% as a result.

With consumer spending key to a rebound in the Australian economy, the RBA’s optimism may have been dashed by the latest figures…

On the monetary policy front, the RBA released its meeting minutes on Tuesday. While there was nothing new, the RBA viewed that the economic slump was likely less severe than initially forecasted.

A 2nd wave of the COVID-19 pandemic and continued fall in employment would need the RBA to revise that view…

For the Kiwi Dollar

It was also a relatively quiet week on the economic calendar.

Key stats included 2nd quarter consumer confidence and 1st quarter GDP figures.

The stats were skewed to the negative, adding pressure on the Kiwi Dollar.

Consumer sentiment softened in the 2nd quarter, with the impact of the coronavirus weighing. The Westpac Consumer Sentiment Index fell from 104.2 to 97.2.

While the markets have shown little interest to 1st quarter stats of late, the GDP numbers did weigh on Thursday.

In the 1st quarter, the economy contracted by 1.6%, following 0.5% growth in the 4th quarter. Economists had forecast a 1% contraction. The larger than anticipated contraction means that it’s a longer road to recovery.

An upward trend in new COVID-19 cases and the threat of a 2nd wave would make the recovery all the more challenging.

For the Loonie

It was a particularly busy week on the economic calendar. Economic data included April manufacturing sales, wholesale sales, and retail sales figures.

May inflation figures mid-week had also muted impact on the Loonie.

It was retail sales figures at the end of the week that pinned the Loonie back. While a slump in April was expected, a 22% tumble in core retail sales was much larger than forecasts of a 13.5% decline.

Crude oil prices did rise in the week, limiting the damage.

The Loonie fell by a modest 0.13% to end the week at C$1.3607, following a 1.24% loss from the previous week.

For the Japanese Yen

It was a relatively quiet week on the data front.

Mid-week, May trade data disappointed, with exports sliding by 28.3%, following a 21.9% fall in April. Japan’s trade deficit narrowed from ¥931.9bn to ¥833.4bn, however. Imports slumped by 26.2%.

Inflation figures had a muted impact on the Yen at the end of the week.

On the monetary policy front, the BoJ was in action on Tuesday, delivering more support.

While leaving monetary policy unchanged, it increased the size of its lending package from $700bn to $1tn. The funds are to support firms struggling as a result of the COVID-19 pandemic.

It was ultimately the threat of a 2nd wave pandemic coupled with the BoJ likely to stand pat on policy that delivered the upside in the week.

The Japanese Yen gained 0.47% to end the week at ¥106.87. In the week prior, the Yen had risen by 2.02% against the U.S Dollar.

Out of China

Economic data included May fixed asset investments and industrial production figures.

Industrial production increased by 4.4% in May, following a 3.9% rise in April, year-on-year. Economists had forecast a 5.0% increase.

Fixed asset investments declined by 6.3%, however, following a 10.3% slide in April.

While both sets of stats were negative, it was the cluster of new COVID-19 cases in Beijing that weighed on risk appetite earlier in the week. News of Beijing bringing the cluster under control was positive.

In the week ending 19th June, the Yuan ended the week up by 0.18% CNY7.0710 against the Greenback. For the week ending 12th June, the Yuan had ended the week flat.

The CSI300 and the Hang Seng saw gains of 2.39% and 1.41% respectively, as geopolitics took a backseat.

Chart of the Week : China Credit Impulse

In today’s edition, we focus on the Chinese economy. The latest data released tend to confirm a cyclical rebound is at work. In last December, there have been a massive jump in imports (+17.7%) and in exports (+9%) in CNY terms. On the top of that, inflation (PPI and CPI) is finally at a turning point.

We expect that the rebound in PPI will continue and that PPI will turn positive in Q1 while higher CPI is likely in the short-term due to stronger demand for pork in January ahead to the Spring Festival that will take place the last week of January. However, afterwards, we should see lower CPI will could give more room for maneuver to the PBoC.

The improvement in data is consistent with our leading indicator for the Chinese economy, credit impulse, which leads the real economy by 9 to 12 months. It is back in positive territory for the first time since the end of 2017, running at 0.7% of GDP (chart below). This is certainly one of the most important macroeconomic news of the past months. As China represents about 1/3 of global growth impulse, positive credit impulse means we could see the constructive global ripple effects in the coming months.

We believe China’s growth will significantly improve in Q2 2020 on the back of positive credit push, lower political risk and more debt stimulus. The US-Chinese trade deal won’t solve all the issues, but it should help both countries to focus on stimulating domestic growth.

Over the past few hours, we have had more information regarding the details of the agreement. One of the main Chinese commitments is to purchase $200bn of goods ($75bn for manufacturing goods, $50bn for energy, $40bn for agricultural goods and $35 to $40bn of services) but, as mentioned previously by our Head of Commodity Strategy, Ole Hansen, such an amount is unlikely to materialize.

We also see that China is tapping further the bond market: based on preliminary data, the local government bond issuance for January is three times the 2019 level and 70% of bonds that will be issued this year will be infrastructure bonds versus 35% last year.

China is also fueling the housing market bubble which is key for China’s growth as it represents roughly 70% of Chinese’s people wealth. In a move to encourage urbanization, China has recently decided to scrap residency restrictions in some smaller cities and it plans to build a record 20 million apartments this year, which is nearly twice the number of new births. In 2020, it seems that China is inclined to prioritize growth over debt, which is ultimately positive for the global economic momentum.

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Christopher Dembik, Head of Macro Analysis at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire.

GBP/USD – Pound Improves to 1.31 in Thin Holiday Trade

GBP/USD continues to move upwards. Currently, the pair is trading at 1.3120, up 0.31% on the day. The sole event on the calendar is High Street Lending, which is projected to tick higher to 41.3 thousand, up from 41.2 thousand in the previous reading.

Positive December for Pound

It’s been an up-and-down month of December for the British pound. Prime Minister Johnson’s convincing election win restored some badly-needed political stability, which has been sorely lacking since the shock Brexit vote back in June 2016. The pound soared after the election results, jumping above the 1.35 line. The gains proved to be short-lived, however, as the pound retreated and fell below the 1.30 line. Investors focused on the day after Brexit, when London and Brussels are set to commence an uneasy transition period, when negotiations will begin on a new free-trade relationship between the two sides. The pound has regained some strength and is up 1.5% in December.


Technical Analysis

GBP/USD tested resistance at 1.3100 on Friday, and this line is again being challenged on Monday. Above, there is resistance at 1.3180, which is protecting the 1.32 level. On the downside, we find support at 1.3030, followed by the round number of 1.30.

GBP/USD 1-Day Chart


Pacific Currencies – Daily Summary


USD/CNY remains below the 7.00 line, which has psychological significance. Currently, the pair is trading at 6.9854, down 0.14% on the day. There is support at 6.98, which was tested in the Asian session. Below, 6.9700 is the next support level. We could see stronger movement from the yuan on Tuesday, when China releases Manufacturing PMI, which is expected to remain at 50.1, which points to stagnation.


AUD/USD enjoyed a good week, posting gains of 1.1 percent. The Aussie took advantage of a broadly lower U.S. dollar. Currently, AUD/USD is trading at 0.6986, up 0.06%. The pair is pressing on the symbolic level of 0.7000, which has held in resistance since mid-July.


With a bank holiday in New Zealand on Monday and Tuesday, traders can expect a slow start to the week for the New Zealand dollar. NZD/USD gained 1.4% last week, and December is set to be the pair’s best month of the year – currently, NZD/USD is up 4.5% this month.