PBoC eases monetary policy but market desires more

The market liquidity conditions have tightened significantly since the PBoC decided to change its fixing mechanism, as PBoC bought CNY against USD to stabilize the exchange rate. In this case, the central bank needs to add liquidity via RRR cut. However, the side effect of monetary easing is the deprecation pressure on CNY and the potential capital outflows. Even more important: Yesterdays rate cut did not trigger a recovery in stock markets. It seems that the market is asking for more action from PBoC. That said, more pressure on the CNY is likely, suspects Commerzbank. 

PBoC cut USD-CNY fixing rate at 6.4043 this morning, the weakest since August 2011, reflecting a weakening bias in CNY exchange rate. In a surprising move yesterday, China's central bank cut policy rates by 25bps and the reserve requirement ratio (RRR) by 50bps. This move makes sense from economics point of view as the slowdown in the Chinese economy seems to gain traction, adds Commerzbank.