1/ The RBI surprised markets with a 50 bp cut overnight to 6.75%.
2/ Another flashpoint of the overnight session was the move in CNH and CNH rates.
3/ Here is a word on USD/JPY technical levels from our London desk.
1/ The RBI surprised markets with a 50 bp cut overnight to 6.75%. Markets expected a 25bp cut. The statement cited the positive monsoon season as a factor in increasing the bank’s confidence that inflation is subsiding. The weakening growth picture domestically and abroad, as well as subdued commodity prices have also been taken into account. Governor Rajan seems to be looking through the risk of inflation pass-through. The Indian Sensex index pared back its losses following the decision from -1% to flat currently, with the rupee is little changed. The move is in line with our divergence view of global central banks, which (on the EM side) places LatAm central banks on the hawkish end, and Asian central banks on the dovish end.
2/ Another flashpoint of the overnight session was the move in CNH and CNH rates. The CNH once again outperformed the CNY, closing the gap that opened between the two currencies since the August devaluation. Now the two currencies are trading roughly at 6.3650 against the dollar. This is important for the functioning of the onshore/offshore markets, for hedging, as well as for meeting the IMF’s easily accessible criteria for joining the SDR. In addition, the CNH interbank offer rate spiked to a record (since the fixing began in 2013) 8.73%, while short-dated hibor rates rose by as much as 200 bp. One interpretation for this spike is to see it as a consequence of the USD/CNH selling. Unlike the onshore market, the PBOC can’t replenish the immediate shortage of CNH. So unless the HKMA steps in with repos, we can get a spike in rates.
3/ Here is a word on USD/JPY technical levels from our London desk. The daily Ichimoku cloud resistance continues to hold after a test last Friday, and it comes in today at 120.60. Above that, the 200-day moving average comes in at 120.90. As such, we see the near-term risks as skewed to the downside for USD/JPY, especially with the sharp move lower in the Nikkei overnight.