China interest rate cuts support DXY on wider US policy gap, more cuts to come say China media

After a monthly meeting, the PBOC lowered the one-year loan prime rate by 5 basis points to 3.65% from 3.7%, while the five-year rate was cut by 15 basis points to 4.3% from 4.45%, reducing the cost of payments on existing loans. 

Markets reacted negatively to the policymakers trimming the lending rates due to the deepening troubles in the economy. China's economy narrowly avoided a contraction in the second quarter with an expansion of just 0.4% as virus lockdowns weighed on industrial and consumer spending. Nevertheless, despite the economic damage inflicted by its strict virus policies, President Xi Jinping's signature strategy remains in play even as much of the world drops restrictions.

In recent trade, there is news that China's Securities Times reported that China may reduce RRR this year to compensate for MLF maturity. The article states that RRR cuts may lower lending prime rates. It is with noting that this is a state-run agency reporting such opinions. 

We saw another slide in the yuan to its lowest since late summer 2020 at 6.8753 overnight. This was good news for the US dollar as the policy gap widens but will likely continue to weigh on the Aussie, reflecting China's position as the largest buyer of Australian resources. The property crisis, which accounts for about a quarter of gross domestic product, is also under pressure, hitting Australia's iron ore export market.