Forex Today: Yen crosses bid despite drop in Asian stocks, China injects liquidity

• China cut the reserve requirement ratio (RRR) for the fourth time this year, but the move has failed to put a bid under the risk assets.
• Asian stocks reported losses, still, the anti-risk JPY remained on the defensive.
• Brexit and Italy headlines could influence the majors in Europe.

Forex today saw JPY crosses remain bid despite the losses in the Asian equity markets.

The People’s Bank of China (PBOC) announced yesterday that it would cut the reserve requirement ratio (RRR) by 100 basis points. The rate cut will come into effect on Oct. 15 and will inject CNY 750 billion in the system.

More importantly, the size of the rate cut and the timing points to divergence from the Federal Reserve (Fed). There is a consensus in the market that the move is aimed at countering the negative impact of the  US-China trade tensions, which could be felt acutely in the coming quarters.

However, the equities aren’t buoyed by the surprise monetary policy easing. For instance, the Shanghai Composite fell 3 percent. Hong Kong’s Hang Seng fell 0.9 percent, Seoul’s Kospi lost 0.4 percent and Sydney’s S&P-ASX 200 dropped 1.2 percent. Stocks in New Zealand and Singapore posted gains, while the Japanese markets were closed for a holiday.

Meanwhile, the USD/CNY printed as 7.5-week high of 6.9053, before falling back to 6.90. Looking beyond the rate cut, the CNY in early trade as the PBOC set the yuan reference rate at the weakest level since May 11, 2017.

It appears that the surprise rate cut has revealed to the markets that Beijing is getting jittery about prospects of a sharp slowdown in the economy in the coming quarters. This could be the reason behind the drop in the Chinese and other Asian equity markets.

However, the risk aversion has failed to put a bid under the traditional safe havens like the Japanese Yen and gold. The USD/JPY pair printed a low of 113.65 before rising back to 13.85, up 0.10 percent on the day. The AUD/JPY and NZD/JPY also gained 0.20 percent each.

Key headlines from Asia

• PBoC steps up monetary easing – Nomura

• China will not resort to a deluge of strong stimulus policies: China’s Finance Minister – Xinhua

• EU ready to play ball on Brexit, offer UK a trade deal – Bloomberg

• Surveys show Brexit uncertainty weighing down UK businesses – Reuters

• China’s Caixin Services PMI leaps to 53.1

• Oil rally due to geopolitical reasons: Qatar’s Energy Minister – Reuters

• US Fed’s Bullard cautioning that inflation pressure not as great as it seems – BloombergTV

Economic data due in Europe

06:00 GMT German industrial production

08:30 GMT Eurozone Sentix Investor Confidence

Events in Europe

16:00 GMT ECB’s Ewald Nowotny, Austrian Finance Minister Hartwig Loeger and Erste Group Chief Executive Andreas Treichl take part in a panel discussion about the future of the financial sector in Vienna.

What’s brewing in the majors?

EUR/USD: Italy remains a risk

The European Commission (EC) is not happy with Italy’s budget deficit plans as they breach what the EU asked the country to do in July. Italy’s structural deficit is set to rise by 0.8 percent of GDP under a planned headline deficit of 2.4 percent of GDP in 2019. The council of EU ministers, however, asked Italy in July to reduce that structural deficit by 0.6 percent of GDP next year.

Meanwhile, Rome made it clear on Saturday that it would “not retreat” from its spending plans. As a result, the Italian yields could rise, dragging the EUR/USD below 1.15 levels.

GBP/USD: Focus on Brexit

Brexit optimism and weaker-than-expected non-farm payrolls, put a bid under the GBP on Friday. The bullish sentiment extended over the weekend, with the EU’s Juncker saying no-deal is not an option and Tusk saying a deal is possible by the end of 2018.

However, as of writing, the pair is struggling to build on Friday’s break above 1.31. Technically speaking, the currency pair is looking north, having crossed the trendline sloping downwards from the Sept. 20 high and Sept. 26 high.

USD/JPY: Focus on yields

The USD/JPY’s resilience in Asia has kept the doors wide open for a re-test of the last week’s high of 114.55. The pair will likely pick up a bid in Europe if the stocks respond positively to China’s rate cut. Further, the prospects of an above-forecast US inflation reading (due later this week) is high, courtesy of the oil price rally to four-year highs. Hence, there is little scope for a deeper pullback in the treasury yields and the USD/JPY. Nevertheless, there is merit in being cautious as the weekly chart is flashing signs of bullish exhaustion.