China Cuts Rates Again

Daily Analysis - 26/08/2015

People’s Bank of China Reduces Benchmark Interest Rate and Cuts Bank Reserve Ratio


In a surprise move, Chinese policymakers moved to ease monetary policy and liquidity conditions by taking a more accommodative approach to policy adjustments in light of the carney overcoming local equity markets.

PBOC Loosens Further

Amid speculation that the Chinese economy continues to experience an accelerating pace of capital outflows, policymakers stepped in with additional measures to ease financing conditions. The move caught markets by surprise amid one of the worst losing streaks on record for Chinese equities. In conjunction with the rate cute and reduction of the reserve ratio requirement for banks, the People’s Bank of China also devalued the Yuan further overnight to the lowest level since 2011, fixing the reference rate to the dollar at 6.4043. China has been selling treasuries at a record pace to bolster recent policy moves, reportedly selling $100 billion worth of exposure to US Treasuries over the past two weeks alone to maintain FX targets in the Yuan. The Shanghai Composite has managed to stage a modest bounce during today’s session, gaining just over 1% in trading after falling more than 15% in the prior two sessions.


Market Bounce Fizzles

Stocks globally reacted positively to the news that Chinese policymakers decided to ease monetary policy even further in response to recent concerns about the worsening liquidity picture. Global stock benchmarks managed to stage a rebound before giving back most of the earlier gains as investors sold into the rallies. European indices closed in positive territory with many of the benchmarks recovering all the lost ground before futures trailed off during the American cash equity session. American stocks managed to climb back into the black before giving back all the China intervention gains and closing moderately lower, with the S&P 500 tumbling -1.35%. Risk-aversion and safety-assets such as gold lost precious ground as speculators moved cautiously back into certain risk-assets. Nevertheless, the Yen carry-trade has seen the bounce come to an end, potentially indicating further losses in financial markets as investors continue unwinding exposure.


Crude Claws Back

The worsening outlook for Asian economies and emerging markets has seen oil prices trend near their lowest level since the last financial crisis of 2009. Besides the troubling demand side of the equation, the supply side continues to show that oversupply conditions are likely to persist into next year as OPEC output exceeds targeted quotas. Slowing US production has not been enough to foment a rebound in the WTI benchmark however the American Petroleum Institute’s weekly crude stocks number released yesterday showed an inventory drawdown of -7.300 million barrels from stockpiles. The kneejerk reaction to the drawdown was an immediate uptick in oil prices which also benefited from the tailwinds of the earlier Chinese rate cut announcement. However, should the Department of Energy crude oil inventories numbers due late in the session show another surprise build it could spell the end of the recent bounce in prices with key benchmarks retesting recent lows.


AUDUSD Equidistant Channel Technical Pattern

After a brief respite, the Australian dollar continues to cede precious ground as successive policy adjustments in China underline the growing uncertainty in the world’s second largest economy. With one of its biggest trading partners suffering a downturn, Australian policymakers might be forced to act further, embracing further monetary accommodation to maintain economic growth and keep the Australian dollar competitive. The AUDUSD currency pair is currently setting up in an downward trending equidistant channel formation exhibiting a strongly bearish bias. Any further rebound in the US dollar could see the downside accelerate, with ideal positions initiated at the upper channel line targeting the lower channel line for an exit. Trading against the trend is not suggested due to the narrowing reward characteristics and increased risk.


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