China’s interest-rate swaps fell the most in four weeks after the central bank cut interest rates for the second time in a month, while the yuan dropped ahead of data forecast to show slowing growth.
The People’s Bank of China lowered the one-year lending rate 31 basis points to 6 percent late yesterday and the one- year deposit rate 25 basis points to 3 percent, effective today. The monetary authority pumped 225 billion yuan ($35.3 billion) into the financial system this week, the biggest injection since January, by conducting reverse-repurchase operations, data compiled by Bloomberg show. Consumer prices climbed 2.3 percent in June from a year earlier, the least in 29 months, according to the median estimate in a Bloomberg survey of economists before an official report on July 9.
“The PBOC is likely to put forward a combination of tools, with the rate cuts showing its stance to support the economy, and liquidity tools to release funds,” said Frances Cheung, a Credit Agricole CIB strategist in Hong Kong. “The policy-rate cuts, ahead of a slew of economic data releases next week, may not be taken sanguinely by the markets.”
The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, fell 11 basis points, or 0.11 percentage point, to 2.46 percent as of 16:31 a.m. in Shanghai, according to data compiled by Bloomberg. That’s the biggest one- day drop since June 8, when the PBOC’s first interest-rate cut in three years became effective. The rate fell 13 basis points from June 29, a second weekly decline.
The seven-day repurchase rate, a gauge of funding availability in the financial system, fell 54 basis points to 3.48 percent, according to a weighted average compiled by the National Interbank Funding Center. That’s the biggest drop since Feb. 27. The yield on the five-year government bonds declined five basis points, or 0.05 percentage point, to 2.76 percent, according to the Interbank Funding Center.
Growth in the world’s second-largest economy probably slowed to 7.7 percent in the second quarter from 8.1 percent in the preceding three months, according to a Bloomberg survey of economists ahead of official data due July 13. That would be the least since the first quarter of 2009. Export growth is expected to slow to 10.6 percent in June from a year earlier, compared with 15.3 percent in May, according to another Bloomberg survey before a report next week.
China will cut interest rates twice more this year, by 25 basis points each time, Lu Ting, head of greater China economics at Bank of America Merrill Lynch in Hong Kong, wrote in a note to clients today. Lu also expects banks’ reserve-requirement ratios to be lowered by 150 basis points before year-end.
The yuan weakened 0.13 percent to close at 6.3644 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It fell 0.16 percent from June 29, the first decline in four weeks. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 1.58 percent. The PBOC lowered the reference rate by 0.09 percent to 6.3249. The currency is allowed to trade as much as 1 percent on either side of the daily fixing.
The Dollar Index, which tracks the greenback against the currencies of six major trading partners, has climbed 1.2 percent in two days as China’s rate cut and one by the European Central Bank failed to assure investors that the moves would be enough to boost global economic growth.
“The yuan’s outlook will be obviously even dimmer given the recognition of a softer domestic economy and a stronger dollar,” said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia (CBA), the most-accurate forecaster of the yuan in the past six quarters. Ji said in a separate interview this week that he’s currently reviewing forecasts for the yuan and will probably trim estimates as he expected the PBOC to curb gains.
In Hong Kong’s offshore market, the yuan dropped 0.16 percent to 6.3658 per dollar, the lowest level in more than a week. Twelve-month non-deliverable forwards slipped 0.12 percent to 6.4105, a 0.72 percent discount to the onshore spot rate.
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