Forex Trading Library

Stand by for monetary easing from China

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Latest inflation figures from China saw the inflation rate rise at its slowest pace in years, rising 0.8% below estimates of 1.1%, and down from December’s 1.5% growth. Falling Crude oil prices took its toll on the Chinese economy as well as disinflation in the world’s second-largest economy is now being seen as a call for further monetary easing from the PBOC.

The Producer Price index also declined, shrinking -4.3%, below estimates of -3.7% and down from -3.3% previously. The weaker than expected inflation readings is likely to weigh in on Australia as well, adding more impetus for further rate cuts from the RBA in the coming months while muting the prospects of any rate hikes from New Zealand.

In regards to the RBA, markets are expecting to see another rate cut of 25bps by May this year, taking the interest rates in Australia from current 2.25% to 2% later in the year. As far as the RBNZ is concerned, the latest figures from China are also likely to impact policy decisions in New Zealand as inflation could remain depressed for the next quarter or two with some experts taking a very dovish view on the RBNZ expecting to see a 20bps rate cut in New Zealand’s interest rates.

Economists expect PBOC will follow up on a rate cut in the first quarter of this year or at least around March/April. The last rate cut from PBOC was in November 2014 to bring the interest rates at currently 5.6%, with expectations of a 20bps rate cut on the horizon. It was only earlier in February that the PBOC had eased its Reserve requirements ratio in a sign that was largely translated as a preemptive move to boost economic growth.

During the overnight session, Fed Governor Jerome Powell, a voting member of the FOMC in a speech highlighted the risks of a strong dollar. He noted that the Fed is currently looking for evidence that inflation in the US will return to its target 2% range. While the Fed did not comment much on the impact of the strong US dollar, Governor Powell commented that the rising US dollar would most likely weigh on the exports while keeping short-term inflation low via import prices.

Commodity currencies were largely muted on the news as expected. The lower than expected inflation growth, while dovish does bring with it some prospects of further monetary easing, which should help support these currencies, namely the Australian and the Kiwi Dollar.

At the time of writing, the NZDUSD was seen trading near $0.742 handle and below yesterday’s highs of $0.745 while the AUDUSD eased from its early session highs of $0.78 to trade near $0.782 levels, while the USDJPY continued its gradual decline from last Friday’s highs of 119, to trade near 118.5.

The Asian equity markets were mixed with the Nikkei down -0.6% while the Shanghai composite and the Hang Seng managed to post modest gains of 1% and 0.04% respectively.

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