China cuts RRR 100bp

Forex News and Events

Asia equity markets are all in the red after a larger than expected RRR cut of 100bp failed to motivate buyers. The PBoC reduced the minimum reserve requirement ratio (now 18.50% for large lenders), in the biggest one time move since the financial crisis geared towards lift dwindling economic growth. As expressed in numerous reports we expect Chinese policy markets to continue with a proactive strategy to support economic weakness and defend against deflationary threat. Recent GDP data showed the slowest pace since 2009 at 7% y/y. We anticipate a further 50bp of two 25bp cuts in the main policy rate in 2015. Despite the rate cut that would have weakened any other currency the CNY remained resilient. Not surprisingly the China continues to show the world a stable and strong Yuan, fixing USDCNY 12pips lower to 6.1255, but USDCNY climbed marginally 0.1% to 6.2034. We anticipated USDCNY will continue to strengthen despite economic headwinds. While economic data and monetary policy divergence should push USDCNY higher, Chinese authorities aspiration to be included in the IMF’s SDR will keep CNY well supported. Initially there was heavy buying on the easing but concerns over China’s ability rejuvenate growth. In addition the effect of stricter marginal trading rules and larger number of shares available for short sales also helped pressure the downside. Elsewhere in the forex markets, commodity currencies (AUD, NZD, CAD, and NOK) where all gainers of the PBoC easing. AUDUSD rallied to 0.44% to 0.7843 while NZDUSD rose 0.49% to 0.7724 yet both pairs are now feeling sellers entering the market.

Still short the EUR

Interestingly it seems that the only asset pricing in Greek risk is German bonds. Perhaps they know something we don’t. Rumors that the IMF would allow Greece to skip or delay a debt repayment was killed by the IMF head Lagarde. “We never had an advanced economy actually asking for that kind of thing, delayed payment,” Lagarde said in a Bloomberg interview. “And I very much hope that this is not the case with Greece. I would certainly, for myself, not support it.” We still think Greece negotiations with creditors are at an major impasse (Greece government unlikely to agree to financial servitude) and risks of a default are extremely close. A €747mn repayment is due May 12th. With Greek risk mounting and ECBs QE program undisturbed, we remains sellers of EUR on rallies.

Not buying Crude or CAD recovery

Crude oil’s strong recovery has given commodity currencies a second wind making them outperformers in the G10. However, we are skeptical of crude’s recovery and even more so of the CADs. Despite slightly hawkish BoC minutes, the rate cuts are still on the table if growth disappoints. While given the deeper slowdown in the US, the BoC’s official forecast seems optimistic. Stephen Poloz, the BoC governor, stated that the falling oil price is having an "atrocious" effect on the country's economy but so far we have not seem much evidence. We expect that growth heads winds will soon catch up with Canada. With crude prices not expected to meaningfully improve (IEA sees OPEC supply growing the most in four years due to Saudi Arabia production increase plus Iran output question) we remain constructive on USDCAD and buy on dips for a move back to 1.2850 highs.