The US Dollar Weakens as PBOC Cut Rates Ahead of Jackson Hole


Although the US Dollar made a new high before the rate cuts, it pulled back from a five-week high after the Peoples Bank of China (PBOC) cut rates earlier today.

The 1-year prime loan rate was lowered to 3.65% from 3.7%, while the 5-year prime loan rate was reduced to 4.30% from 4.45%. The moves were quite different from markets forecasts which predicted 10 basis-point reductions for both.

These moves raised China’s CSI 300 and Hong Kong’s Hang Seng indices, with other APAC equities languishing. The commodity and growth linked AUD and New Zealand Dollars which are commodity and growth linked, got a boost while the US Dollar felt some selling pressure.

The Chinese rate cuts came in the face of a persistent economic flurry from a zero-tolerance Covid-19 policy and property sector woes. Residential mortgages are the most impacted by the 5-year rate and the 15-basis point change, which seems to attempt to restore borrower confidence.

This slow economic activity has been further compounded by dry weather cutting hydroelectricity production.

China’s Sichuan province is an industrial powerhouse that has been hit particularly hard by the energy outages. These manufacturers’ usage limits have been extended from Saturday to this Thursday.

Asian session saw crude oil slipping as speculation mounts that Iranian supply might return online to offset the loss of Russian production. The Brent futures contract dipped under US$ 95.50 bbl, and the WTI contract is below US$ 90 bbl.

Gold keeps lowering after Treasury yields added a few basis points across the curve to start the week. It is trading around US$ 1,744 an ounce before going to print.

The market will be focused on the Jackson Hole symposium, which begins on Thursday. This time last year saw the Fed labeling the accelerating inflation as transitory. This year, markets expect inflation to be heightened.

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