Home The Chinese Conundrum

Financial markets are buzzing as the new trading week begins, with a distinct risk-on feel after the 100 basis point cut to the reserve requirement ratio (RRR) from the People’s Bank of China (PBoC) on the weekend.     While the move to cut the RRR was not unexpected given the pledge from Chinese policymakers to actively ease monetary policy if the drag on economic growth began to raise concerns of a hard landing, and thus a risk to the official GDP target of 7.0%, it was the size of the cut that took markets by surprise.     The full percentage point cut will unleash roughly CNY 1.2trn of liquidity into financial markets, with the government hoping the increased access to capital will stimulate growth and help the Chinese economy achieve what is likely to be a tough GDP target.   The slash to the RRR helped the Shanghai Comp offset some of the losses experienced after Friday’s close when Chinese regulators announced they would be tightening rules on margin lending and increasing the number of equities that can be shorted, though the regional equity index wasn’t able to push itself back into positive territory, finishing its session lower by 1.61%.

Commodity-linked currencies were initially bid-higheron Sunday night when markets re-opened for trading, though the positive effects have since faded as participants try to decipher whether the RRR cut is prudent treatment given economic conditions, or if the flu-like symptoms the Chinese economy is experiencing has the potential to escalate into something far more drastic.   After breaking into the mid-0.78s against the big dollar overnight, the aussie has settled back to essentially an unchanged print heading into the North American open, with AUDUSD trading on the south side of the 0.78 level.

With a lack of economic data released overnight, the euro is taking its cues from Greek headlines, where there is little optimism that a deal will be reached at the end of this week’s Eurogroup meetings.   Greece is expected to submit an updated list of reforms, though it is likely this will be a starting point for the next meeting in May, as opposed to any groundbreaking agreement to unlock the purse strings of Greece’s creditors.   The euro has slid into the low 1.07s against the greenback as disappointment seeps into markets, with the offer tone in the common-currency helping to push the DXY back into the 98s as we go to print.

The North American session will also experience an absence of tier-one economic data, leaving markets heavily influenced by the RRR cut from China along with the progression of Greek headlines as the loggerhead between the two negotiating sides intensifies.   S&P equity futures are broadly higher ahead of the opening bell as positive risk appetite has investors rotating into higher yielding assets, though oil’s strength is fading as front-month WTI ebbs into the low $55s.   The loonie is essentially unchanged from Friday’s close, unable to sustain the positive price action that resulted from the Chinese RRR cut, as deeper underlying issues with the Chinese economy warrant caution for the commodity-linked currency bloc.   Loonie traders are also wary given the large price swings seen last week, and the technical reversal witnessed on Fridayafter the CAD was unable to hold onto fresh yearly highs after the better than expected CPI and Retail Sales data.   The ability of the 100-day moving average to act as support for USDCAD is a positive development for loonie bears, and additional closures this week on the north side of the measure will reinforce the notion a bottom is in place and a bounce in USDCAD is underway.   Bank of Canada Governor Poloz is speaking as part of a panel discussion in New York later today, so expect his comments to be parsed for any references to monetary policy in order to glean any insight as to how the bank is positioned.   We expect Poloz to take somewhat of a neutral to dovish tone in his speaking engagements over the course of the coming month, estimating he’ll want to reiterate the importance of the non-energy export sector to Canada’s recovery, and the role a weaker loonie plays in those developments.

Further reading:

EUR/USD weighed by Greek worries – approaching support

AUDUSD Looks For Resistance; USDCAD Bounces From The Lows – Elliott Wave Analysis




Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.