Folkmar Baur, a currency strategist at Commerzbank, highlights the significant impact of the People’s Bank of China’s unexpected decision to lower the 7-day reverse repo rate by 10 basis points to 1.7%. This rate cut is the first one since August last year.

Market Expects Positive Response

China’s unique economic characteristics and strict capital controls mean that the influence of credit and monetary policy on the currency is less pronounced compared to other currencies. Nevertheless, the reduction in the benchmark rate still carries meaningful signaling implications.

Initially, there were low expectations for short-term effects from the recent Third Plenum, as the focus was primarily on long-term events and reforms. However, the more detailed documents released over the weekend provide a more optimistic view of constructive reforms, particularly in fiscal policy.

Given the weak growth indicators in the second quarter, the support signal from the People’s Bank of China has paramount importance. Furthermore, the upcoming official meeting of the Politburo raises expectations for additional support measures. Therefore, the market is likely to consider more negative scenarios of significant growth slowdown, ultimately providing support to the yuan.