In Asian hours risk sentiment stabilized, mainly on the back of the PboC easing monetary policy yesterday. Even if the latest development appears to have stabilized market sentiment, it seems too early for sustainably improving risk sentiment.
This is especially true as a more dovish monetary policy stance may ultimately increase downside pressure on the currency. This in turn is taken as a negative to others’ export competitiveness. As such it comes as no major surprise that European stock market indices such as the German Dax added only limited upside after the announcement.
From a broader angle it must be noted too that further policy action may be needed in order to make a case of stabilizing growth expectations. When it comes to the EUR all of the above suggests that additional upside risk cannot be excluded, at least in the short-term. This is due to the currency’s strong sensitivity to risk sentiment. However, as both a stronger EUR and weaker commodity price developments should have increased downside risks to inflation, ECB President Draghi may well turn more dovish as part of next month’s central bank rate announcement.
As such monetary policy prospects may become more important anew. This is especially true as the latest development should have decreased speculative short positioning considerably.
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