PBoC cuts rates to shore up market; Fed fund futures edge higher tipping rate rise expected by year-end; improving sentiment sees JPY lose some safe haven appeal

By Kymberly Martin

The USD has strengthened against most of its peers overnight. The NZD/USD trades just above 0.6500 this morning.

Overnight moves in most markets were a mirror-image of the previous night as risk appetite has improved from rock-bottom levels.

Contributing to the improvement in sentiment was an announcement of rate cuts from the People’s Bank of China and a better than expected German IFO survey.

Last night, China announced it will cut its benchmark lending rate by 0.25% to 4.6%. It also cut the Reserve Requirement Ratios for most big banks by 0.5%.

Equity markets have made strong gains on either side of the Atlantic, despite the further 7% fall in China indices earlier in the evening.

Credit spreads narrowed and bond yields rose, along with a rebound in the WTI oil price.

Fed fund futures for year-end have inched higher. Still, despite the improvement our global risk appetite index (0-100%) has only rebounded to a still fairly fragile 20%.

The USD was broadly stronger, regaining most of its early-week losses.

Against this strength the EUR subsided, despite a better-than-expected German IFO survey of the economy.

The EUR/USD trades around 1.1430 this morning down from early-evening highs around 1.15780.

As sentiment improved, the JPY also lost some of its ‘safe haven’ appeal. From around 119.00 yesterday afternoon, the USD/JPY now trades at 119.70.

After its previous wild night, trading in the NZD/USD was more pedestrian last night.

The NZD is one of few currencies to have marginally outperformed the USD over the past 24-hours. Consequently, it has also outperformed on all of the major crosses.

Also, yesterday afternoon’s release of the RBNZ survey of inflation expectations did not provide the market with any excuse to increase its pricing of OCR cuts for the year ahead.

Overnight the ‘risk sensitive’ NZD benefitted from the general improvement in market sentiment, briefly trading above 0.6560 after the PBOC’s rate cut announcement.

It later subsided to trade around 0.6500 this morning. We continue to target 0.6200 by year-end.

The AUD/USD followed a similar trading pattern. It made intra-night highs, around 0.7250, soon after the PBOC announcement.

However, this move did was not sustained and the AUD/USD trades around 0.7160 this morning.

Today there is a speech by RBA Governor Stevens to look out for. However, being so close to next week’s RBA meeting it might not be expected to provide any great insights into monetary policy.

This evening there is a smattering of US data due and Fed member, Dudley, is scheduled to speak.

Kymberly Martin is on the BNZ Research team. All its research is available here.