China may spook the market with unexpected rate cuts

Aug 15 (Reuters) – China unexpectedly lowered two of its benchmark lending rates on Monday but the policy-easing move could have unintended effects on sentiment. The yuan slipped in reaction while Chinese stocks reversed mild opening losses.

The one-year medium-term lending facility (MLF) rate was lowered by 10 basis points, as was the 7-day reverse repo rate, while some maturing loans were allowed to expire. All analysts polled by Reuters had expected the MLF to be held.

Chinese policymakers have been reluctant to ease monetary conditions, in light of decades-high inflation threatening developed economies. China’s July consumer prices rose at their fastest annual pace in two years.

Monday’s sudden rate cuts, in the wake of very weak bank lending data Friday and forecast-missing retail sales, might make markets nervous. It suggests Beijing is getting more worried about the economic impact of maintaining its zero-COVID strategy amid a languishing property market.

Yuan investors might be fretting too. The rally sparked by China’s rate cuts has sent USD/CNH to 6.7627 and out of the daily Bollinger downtrend channel. If it ends Monday above 6.7715, the uptrend channel will be engaged. That signal could inspire USD bulls to add to bets for the 6.8000 barrier to be reclaimed and for May’s 20-month high of 6.8391 to be challenged soon.

(Ewen Chew is a Reuters market analyst. The views expressed are his own.)