China’s decision to cut its benchmark interest rates for the first time in two and a half years reflects the recent deterioration in economic data. With GDP and inflation both at four-year lows, Chinese authorities cannot content themselves solely by reducing the required reserve ratio on banks as wasthe practice in 2011-2012. The impact of China’s move is a classic play of boosting global equities, commodities and their currencies, reinforcing investors’ preferred play of shorting EUR and GBP vs the Canadian dollar. Yen weakness returns to the fray alongside the rebound in equities, proving that any USD/JPY pullback is a temporary opportunity to admit bulls into the December-Abe party.
– China cut its one-year deposit rate by 0.25 % to 2.75% and its lending rate by 0.4 % to 5.6%, which means the spread between both rates is now at 2.85%, the lowest in 16 years.
– Thursday’s flurry of manufacturing and services surveys from the US, China and Eurozone confirms the status quo in the currency markets; a cooling off in the pace of US manufacturing expansion, despite remaining the highest rate in the G7 –, while both Germany and China eked out an expansion, albeit at a slower pace, as did the pan-Eurozone measure of both sectors. France remained in contraction territory.
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Autor: Ashraf Laidi.