China’s latest rate cut did little to dent the CNY’s recovery. Yesterday’s 10 bps reduction in the 14-day reverse repo rate to 1.85% paled compared to last Wednesday’s 50 bps decline in the Fed Fund Rate to 4.75-5.00%. The People’s Bank of China was ensuring ample liquidity ahead of the National Day holidays starting October 1. Conversely, the Fed’s easing sought to avert a further cooling in the US labour market. Like Bank Indonesia’s surprise rate cut last week, the PBOC’s action reflected confidence in a more stable currency environment driven by the Fed’s rate-cutting outlook. 
USD/CNY peaked at 7.2775 on July 24 before declining to the year’s low of 7.0428 last Friday. Despite yesterday’s 0.1% rise to 7.0521, USD/CNY held below last year’s closing level of 7.10, confident that US recession fears have now overshadowed China’s slowdown worries. To break below the psychological level of 7.00 this year, USD/CNY will need the DXY index to depreciate below 100, a scenario we have forecasted through 2025.
Looking ahead, Fed President Neel Kashkari (Minneapolis) favoured two 25 bps cuts at the remaining FOMC meetings in November and December. Austan Goolsbee (Chicago) took a longer view, expecting multiple cuts over the next 12 months to get rates closer to neutral. However, Fed Governor Michelle Bowman may temper expectations in her remarks today, explaining her dissent of the 50 bps cut in favour of a 25 bps reduction. On Thursday, Fed Chair Jerome Powell will likely reiterate the Fed’s recalibrated stance that a further loosening of the labour market was unnecessary to bring inflation down to the 2% target. We see the Fed Funds Rate declining to 3% in 2025.
Quote of the day
“Learning is a matter of gathering knowledge; wisdom is applying that knowledge.”
Dr Roopleen
September 24 in history
Prime Minister Narendra Modi opened India’s 100th airport in the Himalayan mountains in 2018.
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