Welcome back to Monday Asia in what looks an action packed week.
Friday saw the People’s Bank of China cut their benchmark rate by another 0.25% to 4.35%. This is the 6th cut of official interest rates in the last 12 months! Interestingly enough, the control that the PBOC has, allows it to cut rates for ‘businesses and commercial purposes’ but not for mortgages. This is intended to guard against the formation of a housing bubble. Wouldn’t the RBA and RBNZ love that!
Alongside the rate cut was a cut in the Reserve Requirement Ratio by 0.5% to 17.5%. The RRR is the level of capital that banks must hold on their books and the cut has the effect of flooding the economy with an increase of liquidity intended to spur spending and economic growth.
China has continued on the path of financial system reform and a move towards the liberalisation of their market. In a major change, Chinese banks no longer have to be completely in line with the PBOC when it comes to setting their own deposit rates. The PBOC has said that it will remove this deposit ceiling, further inching the economy towards the open market.
The Aussie Dollar and its reaction is a weird one. It doesn’t quite know what to take from the Chinese move because on one hand the flood of liquidity is a good thing, but on the other hand it also means that the Chinese economy is in serious trouble and PBOC policymakers are doing everything in their power to try to correct the sinking ship.
The Swiss Ramble:
The other major story heading into this week is the plunging Euro. Friday’s trading saw the common currency drop through yet more support levels and this has brought the Swiss Franc back into play.
With the floor falling out from under the Euro, all that money has to find a home somewhere and that home seems to be in Francs. Something that the Swiss National Bank is not too pleased about. I’m sure we all remember the EUR/CHF 1.2000 floor?… Well with price in the 108s and heading south again fast, the SNB has stepped in with a few timely comments on the news wires.
“At its current level the Swiss franc remains markedly overvalued.”
“The depreciation has been positive, but we expect further development in this direction.”
Check out the EUR/CHF chart and some trading ideas in the Chart of the Day section below.
On the Calendar Monday:
CHF Daylight Saving Time Shift
EUR Daylight Saving Time Shift
GBP Daylight Saving Time Shift
NZD Bank Holiday
“New Zealand banks will be closed in observance of Labor Day.”
EUR German Ifo Business Climate
USD New Home Sales
Chart of the Day:
Following on from the evolving narrative of Euro weakness that we spoke about above, today’s chart of the day takes a look at the Swissy.
Central banks can huff and puff, jawboning until their heart is content, but the market is always right and the market will always get what it wants. And right now, that is to sell Euros against the Franc.
Take the better prices to short into and run with them. The snap down will come and it will come twice as hard as any short lived rally off technical support and a jawbone.
Do you see opportunity in trading EUR/CHF?
Dane Williams – @VantageFX
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