China Cuts RRR 100bp
Swissquote Bank Ltd | Apr 20, 2015 08:03AM ET
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 USD/CNY 12pips lower to 6.1255, but USD/CNY climbed marginally 0.1% to 6.2034. We anticipated USD/CNY will continue to strengthen despite economic headwinds. While economic data and monetary policy divergence should push USD/CNY 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. AUD/USD rallied to 0.44% to 0.7843 while NZD/USD 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 USD/CAD and buy on dips for a move back to 1.2850 highs.
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The Risk Today
EUR/USD continues to bounce. However, prices seem to fade near the resistance implied by the 61.8% retracement (1.0839). Another hourly resistance stands at 1.0888. Hourly supports are given by 1.0734 (17/04/2015 low) and the rising trendline (around 1.0682). In the longer term, the symmetrical triangle favours further weakness towards parity. As a result, any strength is likely to be temporary in nature. A strong resistance stands at 1.1114 (05/03/2015 low). Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support).
GBP/USD made a large upper shadow near the key resistance at 1.4994 on Friday, suggesting a potential weakening buying interest. Hourly supports can be found at 1.4917 (17/04/2015 low) and 1.4813 (16/04/2015 low). Another key resistance stands at 1.5166. In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). A break of the key resistance at 1.5166 (18/03/2015 high) is needed to invalidate this scenario. Another key resistance stands at 1.5552 (26/02/2015 high).
USD/JPY remains weak as can be seen by the breach of the support at 118.72. Hourly resistances can be found at 119.27 (17/04/2015 high) and 119.75. A key support stands at 118.18. A long-term bullish bias is favoured as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).
USD/CHF is challenging the key support area between 0.9491 and 0.9450 (see also the 38.2% retracement). Hourly resistances can be found at 0.9585 (17/04/2015 high) and 0.9712 (16/04/2015 high). In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. As a result, the current weakness is seen as a countertrend move. Key supports can be found at 0.9450 (26/02/2015 low, see also the 200-day moving average) and 0.9170 (30/01/2015 low).
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