Going back a few years, an interest rate cut and reserve ratio requirement from the People’s Bank of China would have been enough to see the risk assets, particularly the China-proxy Australian dollar, rally hard in response to the prospect of firmer economic growth outlook for the world’s second largest economy.
But 2015 is clearly not 2009, with the Aussie dollar slipping lower on Friday evening despite the renewed stimulus injection from the PBOC. Having hit a high of .7295 in the minutes immediately following the PBOC announcement, the AUD/USD fell to as low as .7202 before closing the week out at .7216 — the level it’s currently trading at in Asia this morning.
The unusual price action, at least compared to historic norms, is summed up perfectly by Ray Attrill, global co-head of FX strategy at the NAB, in his morning note.
“Does China’s latest monetary policy easing, right on top of the ECB’s public commitment to intensified easing, reduce EM growth and asset market concerns to the point where the Fed will now find it easier to lift rates his year? Or are these actions a case of The ECB and China getting its retaliation in first upon resigning themselves to the limited likelihood of the Fed moving anytime soon? Or, does the sixth PBOC easing in twelve months, with another cocktail of rate cuts plus RRR cuts, underscore the depth of, and concern for, the China slowdown? Do China’s actions increase or reduce the likelihood that its currency policy will soon have to resume supporting monetary policy with fresh depreciation?”
According to Attrill, there was no clear cut answer to those questions, although he believes the unwind in the Australian dollar was more a result of US dollar strength rather than Australian dollar weakness.
“It would be disingenuous to suggest we got a clear answer to any of these questions on Friday. Nowhere was this more evident than in the AUD FX market. The China news (25 points off the key lending and deposit rates, a 50 point RRR cut and full abolition of the deposit rates ceiling) initially added fuel to the uptrend in the AUD that had commenced late in the Australian session on Friday. It pushed AUD/USD up to 0.7295 from around 0.7260, only for the pair to collapse to a low of 0.7202 in the following 90 minutes. We closed at 0.7216, +0.11% over the whole of Friday. In explaining the move, some were quick to suggest that one of the next shoes to drop would be from the RBA, though the move looks to have been more a result of general USD strength post PBoC.
With no major Australian or Asian data scheduled for release today, movements in USD/CNY and Chinese stocks from 12.15pm AEDT, along with positioning adjustments before key central bank meetings from the US Federal Reserve, Reserve Bank of New Zealand (Thursday morning AEDT) and the Bank of Japan on Friday afternoon, will likely dictate direction in the Australian dollar today.
The full Australian dollar scoreboard can be found below.
- AUD/USD 0.7214 , 0.0002 , 0.03%
- AUD/JPY 87.59 , -0.06 , -0.07%
- AUD/CNY 4.5800 , -0.0019 , -0.04%
- AUD/EUR 0.6553 , -0.0003 , -0.05%
- AUD/GBP 0.4710 , 0 , 0.00%
- AUD/NZD 1.0661 , -0.0055 , -0.51%