Profitability: China’s interest rate cut surprised markets

Recently, the People’s Bank of China announced the one-year reduction in the Prime Loan Rate (LPR) to 3.70%, with a reduction of 10 basis points corresponding to the month of January, meanwhile the Reference Lending Rate for a term of 5 year, stands at 4.6% with a reduction of 5 basis points, a situation that has not occurred since April 2020.

The preferential loan rate serves as a price reference for bank loans and surprisingly, the reduction in the 5-year rate caused variations in the bond market, placing China’s Treasury bonds at 2.72%, minimum levels since June 2020 and US Treasuries at 1 , 84%, it is worth mentioning that the yield spread between the US and China narrowed, and this favored the performance of the USD / CNH pair, despite the trade challenges between both powers and the expectations of the Federal Reserve that put pressure on supply. and question of the couple.

Diego Ramirez Financial analyst at ProfitWay believes that the financial markets are increasing the degree of volatility as a result of the recent statements by the President of the United States on commercial matters, acknowledging the efforts of the head of negotiations Katherine Tai to resolve the commercial disputes with her Asian counterpart Despite the argument that China is not meeting its purchasing obligations, which is related to the supply chain disruption, a key factor in the rise in inflation, in addition to the ratification of support for Federal Reserve Governor Jerome Powell in the intention to reinstate monetary support despite concerns about the possible increase in faster interest rates to control the increase in inflation.

In addition, the decision on the PBOC interest rate indicates a moderate attitude of the economy, despite the positive economic data such as the annual GDP 2020 which stood at 8.1%, in addition to the increase in industrial production to 4.3% and the unemployment rate at 5.1%, showing signs of a gradual and medium-term recovery, generating optimism in the market.

US Unemployment Claims, January Philadelphia Fed Manufacturing Survey and December Existing Home Sales are expected on the economic dossier for the upcoming business sessions, with inflation data expected in the European environment and minutes of the latest monetary policy decision by the European Central Bank, as well as an appearance by Christine Lagarde.

ProfitWay is of the opinion that an intraday close below the six-week low at 6.3450 is needed for the trend of the USD / CNH pair to reach the 2021 low at the price of 6.3305 and if it is not reached, it may an affirmative reversal to initial price resistance 6.3585 yuan per dollar.

Diego Ramirez.

Financial analyst at ProfitWay Mexico.

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