PBOC Cuts RRR Spurs Risk On Trades

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Market Drivers Feb. 29, 2016

China sells off and drives USD/JPY lower but then PBOC cuts RRR
EZ GE Retail Sales surprise to the upside
Nikkei -1.00% Dax -1.60%
Oil $32/bbl
Gold $1233/oz

Europe and Asia:
AUD Private Sector Credit 0.5% vs. 0.5%
EUR GE Retail Sales 0.7% vs. 0.3%
GBP UK Mortgage Approvals 74.6K vs. 73.7K

North America:
CAD Current Account 08:30
USD Chicago PMI 09:45
USD Pending Homes 10:00

The PBOC surprised the market cutting the RRR rate by 0.5% in mid morning European dealing which spurred a small rally in commodities and helped to quickly push Aussie dollar through the .7150 level.

Earlier in the session Chinese equity markets had another rough day as the Shanghai index closed down -2.39% on investor concern that lack of any progress at the G-20 meeting indicated that policy stimulus was not forthcoming. The PBOC move may well have been a reaction to the day’s trade as Chinese officials continue to try to stabilize their capital markets.

It’s difficult to say if the RRR cut will have any meaningful long term impact and chances are it won’t, as China’s credit problems are structural rather than cyclical and require serious balance sheet clean up. The move was also well telegraphed by the authorities as the RRR cut is the least strenuous course of action for Chinese monetary policymakers to take right now.

Both on-shore and off-shore yuan rates fell to their lowest levels in three weeks in the aftermath of the announcement as Chinese officials continue to slowly devalue the currency. The easing of RRR rate may spur easier credit conditions but it is unlikely to fundamentally expand the demand for commodities and therefore the rallies in copper and oil in the wake of this move may be short lived. The Aussie has remained bid holding above the .7150 level but we believe the pair remains vulnerable to more selloffs especially if the RBA sounds a dovish note in tomorrow’s meeting which could quickly send the unit towards the .7000 mark.

Elsewhere the EUR/USD drifted back to 1.0900 level after making a half hearted attempt at a rally in late Asian trade. The latest CPI data from the region which came in at -0.2% versus 0.1% eyed suggests that deflation is only strengthening the region and that ECB will likely need to expand its monetary policy to combat the conditions on the ground.

In North American trade the market will get a look at Chicago PMI and Pending Home Sales with consensus looking for a decline in manufacturing but a bump in home sales. US data has actually proven to be better than forecast after Friday’s GDP and personal income/spending beats with sentiment in USD/JPY generally improving. Although the pair dropped more than figure in Asian session selloff it’s found buyers ahead of the 112.50 level and could make another run at 114 later in the day if risk flows continue to improve.

Boris Schlossberg
Managing Director

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