PBoC to cut RRR by another 50 bps in Q4 2015

Theoretically it does not make sense for China to maintain a stable currency amid monetary policy easing. Nonetheless, it appears that the PBoC still caps the upside of USD/CNY and USD/CNH via selling its foreign reserves, suggesting that the Chinese authorities do not want to see a fast depreciation of its currency. 

In the meantime, Chinese top leadership will hold key meetings on the 13th Five-Year plan this week. Historical experience suggests that the PBoC tends to maintain market stability during the important policy meetings. All in all, range-trading session of CNY and CNH is likely in the upcoming week. 

"PBoC's rate and RRR cut over the past weekend reinforces the market view that the economy still faces strong headwinds. Most likely Friday's rate cut won't be sufficient. China's central bank will cut the RRR by another 50bps in Q4 2015, and lower the policy rates by 25bps in Q1 2016. Over the short term, the market will focus on the movement of CNY exchange rate", says Commerzbank. 

On Friday, renewed rumors suggested that the renminbi will be included in the currency basket for the valuation of the Special Drawing Rights (SDR) of the IMF. China's regime has created a spectacular hype around this decision in the last few months. And the hype has supported the currency again and again, as Friday's events have shown. 

The rumors surfaced just when the PBoC rate cut should have led to downward pressure on the renminbi. Honni soit qui mal y pense. It seems that the FX markets are, in fact, being fooled by the Chinese PR campaign. From an economic vantage point, it is simply irrelevant whether the renminbi is included in the SDR basket or not.