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Australian Dollar Jumps Across the Board after PBoC Removes Lending Floor

Australian Dollar Jumps Across the Board after PBoC Removes Lending Floor

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: People’s Bank of China removes lending floor > Step towards liberalizing interest rates > AUDUSD BULLISH

As China has grown in economic power and influence, Western developed economies have chided the Asian titan for its controlled economy. That is, by keeping the Chinese Yuan’s exchange rate relative to those of developed economies’ depressed, China has been able to enjoy more favorable terms of trade than its major counterparts, giving it an unfair advantage on the global stage.

Today, one such effort was made towards correcting the unfair advantage China has enjoyed, with the People’s Bank of China announcing that it would scrap the lending floor currently in place. The change, expected to go into effect tomorrow, is aimed at helping provide companies with cheaper credit; thus, in context of the recent credit crunch, the announcement has been perceived as a dovish policy measure.

However, two considerations: first, the PBoC would have to remove any interest rate controls in place as it brings the Yuan to full convertibility, so this move was expected at some point over the short-term horizon; and second, if the Chinese economy is slowing as feared, removing the lending floor could prove to be a negative, as if companies can but are unable to access cheaper financing, credit crunch fears could be exacerbated further.

AUDUSD 1-minute Chart: July 19, 2013

Australian_Dollar_Jumps_Across_the_Board_after_PBoC_Removes_Lending_Floor_body_x0000_i1027.png, Australian Dollar Jumps Across the Board after PBoC Removes Lending Floor

Charts Created using Marketscopeprepared by Christopher Vecchio

Following the announcement, the AUDUSD rallied sharply from $0.9171 to as high as 0.9234 in about 10-minutes, but has since steadied to 0.9213, at the time this report was written. The Australian Dollar was strong across the board, with the AUDJPY rallying from ¥92.01 to as high as 92.55; and the EURAUD slumped from A$1.4293 to as low as 1.4211.

--- Written by Christopher Vecchio, Currency Analyst

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