China’s surprise interest rate cut pushes USD/CNH higher

In a surprise move, China’s central bank today announced its first cut in a key short-term interest rate in nearly a year, following weaker-than-expected economic growth in the second quarter. The economy grew at its slowest pace in over a year, prompting the central bank to cut the seven-day reverse repo rate to 1.7% from 1.8%. The central bank stressed that these rate cuts were part of its strategy to “strengthen countercyclical adjustments to better support the real economy.”

Shortly after the PBoC’s announcement, Chinese banks adjusted their key benchmark interest rates. This was the first adjustment of its kind since August 2023. The benchmark interest rate for one-year loans was cut from 3.45% to 3.35%. The interest rate for five-year loans, which is crucial for mortgages, fell from 3.95% to 3.85%.

In response to these developments, USD/CHN continues the recovery from 7.2597 following the news. Technically, the current development suggests that the pullback from 7.3111 is already complete and a larger advance from 7.0870 is likely to resume. A break of 7.3111 will target a 100% projection of 7.0870 to 7.2827 from 7.1648 at 7.3605, which is slightly below 7.3745 (2023 high). This will remain the preferred case as long as the 7.2597 support holds.