Chinese Rate Cut:
With so much to digest over the weekend, I’ve split today’s Asian Session Morning blog into 2 so I can get them out and shared as quickly as possible.
With all eyes focused on the capital controls imposed on Greece, we also got an interest rate cut from China. The PBOC cut it’s benchmark lending rate to a record low while also lowering the reserve requirement ratio (RRR) for banks. The RRR is important because it is the portion of deposits that a bank must have on hand as cash. This means that a RRR cut effectively encourages banks to loan more than they otherwise would have been able to, thus having a stimulatory effect.
One-year Lending Rate: -0.25% to 4.85%
One-year Deposit Rate: -0.25% tp 2.00%
RRR rates cut -0.50% at some banks.
After Chinese stocks took a nose dive to end the week on Friday, there was concern around the potential domino effect of margin calls leading to more and more selling. Panic is never good for markets and the PBOC felt it’s hand was forced to cut.
It’s a dangerous way of thinking and a prolonging of any perceived bubble in Chinese stocks can surely only be a bad thing…
Past cuts have been AUD/USD positive as the Chinese market is flooded with liquidity to boost demand, but with Greece dominating the market narrative to open the week, the Aussie’s reaction has been mixed.
On the daily chart, price gapped down but was immediately rejected out of the beautiful demand zone that has formed.
This level is highlighted as we zoom in and offers a great level to manage your risk around.
Don’t forget to also take a look at today’s main Asian Session Morning blog post, The Looming Greek Default here.
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