RBA released a less dovish statement, Chinese equities retreated for the fifth day in a row

Forex News and Events

Currency war is far from being over as central banks around the world are easing further their monetary policy. This morning, the Reserve Bank of Australia (RBA) cut its cash rate by 25bps to a record low of 2.00%, in an attempt to devaluate further the Aussie. Governor Stevens expressed dissatisfaction with the current level of the Aussie “against a basket of currency”, adding that “The Australian dollar has declined noticeably against a rising US dollar over the past year”. The Aussie depreciation was judged necessary, especially given the sharp drop in commodity prices. Interestingly, iron ore price for immediate delivery to the port of Qingdao reached almost $60 a ton, up 27% from April 28th low of $47.08. The statement was less dovish than expected as the RBA noticed stronger growth in employment and improving household demand. This last rate cut will not help to take the steam out of the Australian housing market, especially in Sydney and Melbourne were house price are rising steadily while the numbers are more mixed in other cities across the country. But the RBA declared “working with other regulators to assess and contain risks that may arise from the housing market”. In the accompanying statement, the RBA added “the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”. It is therefore the last rate cut for a while, unless the RBA’s outlook deteriorate significantly, justifying further easing. We expect the AUD to remain strong and even to appreciate further as the rate cut was already priced in. Moreover we expect commodity prices to pick up this year, helping the Australian economy to grow at a faster pace.

Chinese equity markets

Chinese equities have skyrocketed since mid-2014 with the Shanghai Composite up more than 110% from 2,010.53 in June 2014 to 4,298.70 this morning. This honourable performance comes despite further signs that the economy is losing steam. Chinese GDP expanded only 7%y/y in the first quarter, down from 7.3% in Q4 2014. Moreover, the April HSBC Manufacturing PMI came in below expectation at 48.9 while analysts were looking for 49.4. The PBoC and the government are aware that recent equity gains are backed by no fundamental, except the perspective of a more accommodative monetary policy stance from the PoBC. Therefore, the government tries to control the equity rally by tightening rules on margin lending as the bubble is fuelled by thousands of Chinese investors who open an account every day. On the other hand, policy makers are aiming to soften the impacts of a contained economic expansion on the job market and overall financial stability by easing monetary policy further. The People’s Bank of China lowered the 1-year lending rate by 25bps to 5.35% on February 28th and decreased the requirement ratio (RRR) by 100bps to 18.50% on April 19th. We expect that the PBoC continue to work together with regulators to control the effects of a more accommodative monetary policy on the stock market. Additional measures in the form of 50bp cut in the bench market rate and further use of liquidity facilities will help corporates yet spillover into the broader economy is less assured. That said we anticipate, growth to return and CNY to remain stable. On the equity side, the Shanghai Composite was down more than 4% during the last session; the index retreated for the fifth day in a row, down 274pts from its peak from April 28th. We think it is a temporary correction and equity prices start to surge again as we expect the Chinese economy will start picking by Q3.