Photo: digsim on flickr
China contributed to today’s rally by cutting interest rates.New fear?
That China will obliterate this rally this weekend.
Citi’s Steven Englander and Andrew Cox explain:
Will PBOC impact on AUD survive the weekend?
The PBOC cut both the 1 year benchmark lending rate and the 1 year deposit rate by 25bps earlier this morning. This is the first cut to policy rates since December 2008 and our economists view the easing as a significant shift PBOC policy and as a definite sign that policymakers will use all means to stabilise the Chinese economy. The surprise policy easing is positive for sentiment and will add to the momentum that we are seeing across risk-correlated currencies and assets.
The outstanding question is whether the impact of the surprise cut on AUD will survive the week/weekend if Chairman Bernanke disappoints later this morning and Chinese data disappoints this weekend? The primary driver of the asset market bounce in recent days has been increasing expectations of further accommodation from the Fed. We thus suspect that the recent wave of short covering fuelled momentum is likely to reverse if Bernanke throws cold water on these hopes and expectations. AUD may outperform its peers but is unlikely to continue to strengthen against the USD if the Bernanke testimony is a major disappointment.
Similarly, there has been much discussion this morning about what the surprise China cut portends for the slew of economic data (industrial production, fixed asset investment, retail sales, and trade balance) scheduled to be released this weekend. Right now investors are taking a very positive view of the shift in policy and markets have rallied, but there is residual fear that weak data will push perception of policy well back behind the curve.