Yuan, LPR And The Perils Of Trading Equities In August

Yuan

The Pboc fixed the midpoint at a market-friendly 7.0433 vs the previous close of 7.0610 so the bias has been to sell this morning.But with small volumes going through, it’s beginning to feel more like your typical August as the markets don’t seem to have much of an ax to grind one way or the other today other than pre risk event positioning squaring. But with the main risk events still a couple of days away, specifically on Friday and PMI’s on Thursday we could be back in the frying pan quickly if the yield curve inverts or Jay Powell reiterates his mid-cycle view of things.

LPR

The PBoC and CBIRC held a press conference yesterday on the new loan prime rate. They noted that interest rate liberalization would help improve monetary policy transmission but is not the monetary policy itself.

None the less improving the market transparency will prove beneficial over the long term as a more open policy approach will be welcomed by foreign investors who typically view Pboc policy transmission as murky at best.

The shift to a more open policy regime is being viewed very favorably even more so as the Pboc moves to adopt additional monetary policy measures to lower the financing cost for the real economy.

US market

Looking at my ECN data, the broad-based equity market declines overnight came on thin trading volumes with the lowest number of shares changing hands across the US exchanges this month.

August is typically a low volume month as US traders usually use the last two weeks of August for a summer holiday respite.

But the low volumes may also suggest a high degree of uncertainty as investors head to the sidelines ahead of the Jackson Hole symposium and the next round of trade discussions.

Which raises the question if the markets will continue to be susceptible to outsized moves due to diminishing liquidity.

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