China joins the currency war with another rate cut

Quick Recap

The Chinese rate cut is the big news over the weekend with the PBOC dropping rates by 0.25%.

That’s important because while the aim is to ensure that growth and inflation remain in manageable territory and consistent with economic goals, the reality is that the PBOC wants to continue to weaken the Renminbi. Indeed the official PMI stats, released over the weekend. showed that both the manufacturing PMI (49.9) and non-manufacturing services PMI (53.9) did better than expected. Of course, the manufacturing number is still in the contraction zone – just – which highlights the headwinds in the economy at the moment.

That’s important because as I highlighted at Business Insider  this morning the Chinese have now joined the ‘currency wars’ with the USDCNY rate now at the highest it’s been since July 2012.

The big question for me however is: “Can the US dollar and the US economy do all the heavy lifting on its own?”

Somehow I doubt it.

I know that Fed Chair Janet Yellen last week essentially pooh poohed any talk that the economy was weakening but seriously so far its just non-farms. Indeed on Friday night US Q4 GDP was released. It showed that growth slipped to 2.2% in the second estimate. This is a step down from the 2.6% estimated last month but still a smidge better than the 2.1% expected. Also out was the Chicago PMI, which tanked to 45.8 from 59.4 last and 58 expected. But consumer sentiment printed 95.4, slightly better than the 94 expected.

The US recovery is real but its conditional on a number of things – one I believe is that the US dollar doesn’t have to do all the heavy lifting for the economies of the globe.

Time will tell and this Friday night’s February non-farm payrolls is going to be huge.

On the day

On the data front today we get a raft of data across the globe. Opening the batting in Australia is the AiG PMI (released and it’s very weak), then TD Securities monthly inflation is out along ith the HIA new home sales and Company gross operating profits. Offshore we see the release of PMI’s in Japan and China before the European versions are out tonight. Also out tonight is EU CPI, US ISM manufacturing and personal consumption data.

And here’s the overnight Scoreboard (10 am AEDT):

• Dow Jones: down 0.45%, 81 points to 18,133
• Nasdaq: down 0.48%, 24 points to 4,964
• S&P: down 0.27%, 6 points to 2,105
• ASX SPI 200 (Futures June): up 11 points to 5,908
• FTSE:  down 0.04% to 6,947
• AUDUSD: 0.7803
• EURUSD: 1.1180
• Crude: $49.52
• Gold: $1,214.52

CHART OF THE DAY:

Gold: it looks like gold is trying to base – but the overhead resistance in the $1,218-25 (the box) needs to be broken if gold is going to kick higher again.

But the levels has to break first and unless or until they do that is the sell zone.