Flash Notes-China: PBoC Cuts Broad-Based RRR

PBoC made its first broad based RRR cuts since May 2012, moving away from its previous “targeted” approach andextending the wave of global central bank easing

    The move is within our expectation and looks to shore up its previous efforts of “targeted” RRR cuts and interest ratereductions, and to mitigate the impact of capital outflows

    The PBoC is likely to ease further and we maintain our call for at least one more round of RRR reduction, as well asfurther interest rate easing in 2015. Our end-2015 forecast for RMB is unchanged, at 6.29/USD and we anticipate awidening of trading bands this year

    FX technical chart suggests that USD/CNH upside remains intact long term, with current consolidation to last severalweeks. For onshore interbank rates, funding costs are expected to turn lower, though more significant reductionsmay only take place post Chinese New Year. We also look for the 2Yx5Y curve to remain flat in the short term beforesteepening pressures build on more significant reduction in funding costs.