Policy gamesmanship intensifies as China and the Eurozone position for impact of potential Fed rise. Japan may also ease as may RBNZ

By Raiko Shareef

New Zealand returns from the long weekend to that China cut interest rates on Friday night, and ... not a lot else. In currencies, the USD is a touch stronger, on balance. NZD sits almost exactly where it was early on Friday morning. It’s a big week ahead.

The PBoC cut its reserve ratio requirement (RRR) by 50 bps across all financial institutions and an extra 50 bps for those who had met additional requirements. The RRR for major banks now sits at 17.5%.

Following the ECB’s move on Thursday, the collective global liquidity injection gave some succour to risk assets, with equities the key beneficiary. The reaction in currency markets (aside from the continued inclination to sell EUR) was a little murkier. Perhaps the best encapsulation of this was in AUD, which jumped up from 0.7250 to near 0.73 immediately after the PBoC, before collapsing to 0.72.

As our NAB colleague Ray Attrill points out, the easing simply adds to the cross-currents of confusion roiling through FX at present:

“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 ... underscore the depth of, and concern for, the China slowdown? Do China’s actions increase or reduce the likelihood that currency policy will soon have to resume supporting monetary policy with fresh [CNY] depreciation?”

We don’t have firm answers for these questions, and the risk this week is that yet another major central bank may join the fray. Analysts are split on whether the BoJ will ease policy further on Friday.

Here at home, we are formally in the minority that is looking for the RBNZ to cut rates this week. That said, it is a line-ball call. NZD/USD will likely trade in step with broader risk appetite ahead of Thursday, with 0.6850 the big level on the topside, and 0.6700 supporting below.

And of course, the FOMC decision. The market prices just a 6% chance of a hike at this meeting. Investors will be more interested whether the statement formalises the sounds of caution being made by Fed speakers in recent weeks.

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Raiko Shareef is on the BNZ Research team. All its research is available here.