Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.
Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.
Reserve requirement ratios (RRRs) - currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks - would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.
China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.
The CNH is once again dangerously close to the PBOC's redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.
As a reminder, the further the yuan drops the greater the offset to US import tariffs, and the more likely that the Trump administration will impose even greater sanctions in the future as it sees Chinese monetary policy as specifically targeted to undermine the impact of Trump's trade war including manipulating its currency.
Brad Setser on China Reserves
No Red Lines
Whatever red lines there were, vanished in the trade war.
Mike "Mish" Shedlock