China's sudden, strong monetary easing is bad news
July 25 (Reuters) -China announced an off-cycle monetary policy easing on Thursday, adding to Monday's surprise series of rate cuts,in a relatively drastic move that could counter-intuitively hurt investor sentiment.
The 20 basis-point cut in the one-year medium-term lending facility rate, with an additional funds injection, came afterChina stocks fell the most in six months on Tuesday.The MLF cut, the biggest since April2020, followed Monday's cuts in several benchmark rates.
Shanghai stocks slid again in the wake of Thursday's move, signalling entrenched investor pessimism. Markets are interpretingthe move as a sign of panic by policymakers, and until consumption concerns are addressed, appetite for Chinese equities remains poor.
The yuan wasslightly stronger on the daydespite the rate cuts, which further widen the U.S.-China yield gap. USD/CNY however pulled off its opening lowstriggered by USD/JPY tumbling furtherin anticipation of another Bank of Japan rate hike.
The outlook for USD/CNY remains bullish fundamentally, as analysts see more monetary policy easing ahead as a multitude of economic risks mount, which might warrant China allowing the yuan to weaken considerably.
If USD/CNY rebounds sufficiently to reclaim the 21-day moving average at 7.2670, it would encourage the continuation of long-USD carry trades.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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