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China rate cut to stabilise sentiment towards AUD - Westpac

FXStreet (Bali) - According to Jonathan Cavenagh, FX Strategist at Westpac, analyzes the market implications from China’s rate cut announcement last Friday, noting that it should help stabilise sentiment towards commodity currencies within the region, adding that the safest way to play the likes of AUD and MYR is likely to be against EUR and JPY rather than against the USD.

Key Quotes

"Can we expect a continuation of these moves over the coming sessions/weeks? That is certainly a risk, although it’s noteworthy that most high beta currencies, that are strongly linked to the China story, finished the New York session some distance from their session highs (e.g. AUD/USD touched a high of just above 0.8720 but closed around the 0.8660 region). One reason for caution on the part of the market is that despite the cut in rates by the Chinese authorities, the PBoC still noted that it was maintaining a prudent stance towards monetary policy. Lower lending rates are not expected to drive a big pick up in bank lending as credit growth is still largely determined by quantitative and prudential measures such as the required reserve ratio (RRR)."

"Still, the move on Friday will lower borrowing costs and help alleviate pressures in the property market, which continues to face significant headwinds. Households also won’t be worse off, as deposit rates were cut less than the lending rate. Moreover, a number of market participants are now expecting additional easing measures over the coming months, including scope for RRR cuts. Hence, even if the moves from last Friday are not enough to help improve Chinese economic momentum, this is only likely to increase the market's confidence that additional easing steps will be undertaken. Our China data pulse (see WSURCNP on Bloomberg) finished last week just below 20%, which leaves us with plenty of scope for a rebound towards the end of this year and into the early part of 2015."

"From a currency perspective, if we look back at the 2012 easing cycle, (which was very short lived at just 2 cuts) it did provide a positive lasting impact on the AUD, if measured on a multi-day/week basis. AUD/USD formed a base around 0.9700 in early June, with the first cut announced on the 7th of June and the rally continued into early August and topped out just below the 1.06 level. The second cut was announced in early July but seemed to have less a positive influence on A$ sentiment. This shouldn’t come as a great surprise though as the first moves in a rate cycle (either up or down) tend to have the largest impact on sentiment. Now there were clearly other factors at play during this period but in edition to AUD/USD rising, we also saw A$ outperformance against EUR and JPY. Interestingly NZD outperformed AUD for much of the June period after the first cut but this trend changed dramatically through July of 2012 after the second cut announcement."

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