Prakash Sakpal, Economist at ING, reiterates their forecast of a 25bp cut in the PBOC policy interest rates before month end. Key Quotes “Premier Li’s post-National People’s Congress press conference contained no new announcement. He said the supply-side reforms would unleash fresh growth drivers to support 6.5-7% growth target. He promised to avoid massive job losses in the process of industrial restructuring, especially shrinking of oversized steel and coal industries, to ease regulations to set up private businesses, and to make financial system more market-oriented. The PBOC continued to weaken its CNY fixing for the third consecutive day. However, today’s 0.14% fixing depreciation was smaller than yesterday’s 0.26%, which was the biggest in more than two months. Weaker fixings and reports that the authorities having drafted the rule for the Tobin tax to curb currency speculation weighed on the FX market. We think the USDCNY-USDCNH basis is the easiest way to express CNY depreciation expectations and it’s little changed. There is not much clarity on implementation of the Tobin tax, which still requires the central government approval. The word is that it would be initially set at zero percent, though a backward step in exchange rate reforms, amid an ongoing drive to internationalize the currency, may intensify confidence sensitive capital outflow and impact the liquidity. We think Governor’s Zhou’s recent remarks that “we will not join the rank of competitive depreciation” and will manage the exchange rate “with reference to” a basket of currencies reduces the policy risk. We also think the exchange rate policy has calmed the depreciation expectations sufficiently to free their hand for more aggressive monetary easing. We reiterate our forecast of a 25bp cut in the PBOC policy interest rates before month end.” For more information, read our latest forex news.