PBOC Cut Rates, Greece Goes "All-In"
Swissquote Bank Ltd | Jun 29, 2015 06:45AM ET
Forex News and Events
The People’s Bank of China (PBoC) didn’t stay on the sidelines for a long time. On Saturday, the Bank cut the 1-year lending rate by 25bps to 4.85%, for the fourth time in seven months, and reduced the 1-year deposit rate by 25bps to 2%. In addition, the PBoC decided to provide targeted reserve requirement ratio cuts for city and non-country-level rural commercial banks with a cut of 50bps as well as for non-financial institution with a reduction of 300bps. While the reserve requirement ratio for major banks remains stable at 18.50% (last cut of 100bps was on April 19). The PBoC continues to ease further its monetary policy as the Chinese economy grows at the slowest pace since Q1 2014. According to the latest forecast, we have not reached the bottom yet as median forecast point toward a growth of 6.8% in Q2 2015. We expect the PBoC to continue easing its monetary policy in an attempt to cushion the slowdown of the economy. However, we anticipate that the Central Bank will provide further targeted easing moves in order to prevent stock markets to be excessively fuelled by cheap money.
Greece will not pay the IMF tomorrow (by Yann Quelenn)
Negotiations have been tensed this weekend between Greece and Eurogroup members. Intensity reached a climax when, against all odds, Alexis Tsipras announced on Saturday night that a referendum will take place on July 5. People will be asked to agree with creditors’ proposal. Greek Government, which failed to reach an agreement with its creditors, is certainly trying to get the support from its people in the likely case that Greece will exit the Eurozone.
It is now almost certain that no payment to the IMF will be made tomorrow. Mounting uncertainties over Greece’s EU membership have boosted bank withdrawals. Over the last two years, €30 million were going out the Greek system in average during weekends. It has been more than € 1 billion that have been withdrawn this weekend. Last week, ECB announced that the Emergency Liquidity Assistance (ELA) was renewed on same levels. But already most of the liquidities provided have been withdrawn. Therefore, Greek government has been compelled to install drastic capital controls (€60 per person and per day). Furthermore, until the referendum takes place next weekend, Greek banks and Athens Stock Exchange will be shut down. However it is worth adding that in case of a very unlikely agreement with Brussels, the referendum will be cancelled.
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Another key issue concerns Credit Default Swaps. Will CDS’ payments be triggered? European banks’ exposure is huge and rating agencies stated that they will not lower Greek grade to D (default) in case of no payment to the IMF. It has been said that a failure to reimburse the aid bailout does not constitute a proper default. We now wonder what will happen when Greece will fail to reimburse its core debt at the ECB next payment on July 20th. From those uncertainties, we are clearly bearish on European Bank stocks.
Markets is now turning to risk-off, moving out from Stocks to Bonds. German 10-Year yield decreased to 0.735% losing 18.5 basis points while European equities are set to end deep into negative territory today. In addition, investors are getting rid of peripheral bonds, pushing Italian and Spanish yields higher. Fear that a contagion will happen is growing. EUR/USD is clearly heading below 1.1000.
EUR/USD - Heading Lower
Yann Quelenn
EUR/USD has broken the support at 1.1050 (05/06/2015 low). Hourly resistance lies at 1.1436 (18/06/2015 high). Stronger resistance is given at 1.1459 (15/05/2015 high). Hourly support lies at 1.0868 (28/05/2015 low). We expect the pair to stabilize below 1.1100. In the longer term, the symmetrical triangle from 2010-2014 favors further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534 (03/02/2015 reaction high).
GBP/USD is still trading between the hourly resistance at 1.5930 (18/06/2015 high) and 1.5626 (17/06/2015 low). We expect the pair to challenge the resistance at 1.5930. In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
USD/JPY has broken the support at 122.46 (10/06/2015 low) before bouncing back above this level. Hourly resistance can be found at 124.62 (10/06/2015). We expect to gain momentum to reach back the resistance at 124.62. Key resistance still lies at 135.15 (14-year high). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).
USD/CHF is heading toward the hourly resistance at 0.9503 (05/06/2015 high). Stronger resistance can be found at 0.9573 (29/05/2015 high). Hourly support can be found at 0.9151 (18/06/2015 low). We expect the pair to test the resistance at 0.9503. In the long-term, there is no sign to suggest the end of the current downtrend. After failure to break above 0.9448 and reinstate bullish trend. As a result, the current weakness is seen as a counter-trend move. Key support can be found 0.8986 (30/01/2015 low).
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