Risk on as China Cuts RRR, ECB Suggests More Flexibility

China cuts RRR by 50 bps; ECB to be more flexible (QE, rate cuts, lower quality collateral); Eurozone CPI remained at 3%, unemployment ticked up to 10.3%; Italian unemployment rose sharply to 8.7%; Swiss KOF hits 2-yr low. Market turns to ADP, Canadian GDP, Chicago PMI and pending home sales.

USD is down across the board as risk appetite returns to markets. NZD, CAD and GBP are the relative strength winners and major European indices are up by about 1%.

Risk appetite returned to markets after China cut its bank reserves ratio for the first time in three years. The RRR was cut by 50 bps to 21%. Risk trades are also supported by MNI report that quoted sources within the ECB that it is open to more rate cuts and that 1% is no longer seen as a rate floor. The ECB also wants to be more flexible, it may widen collateral framework and increase bond purchases.

On the data front, Eurozone CPI estimate remained at 3.0% in November and Eurozone unemployment rate ticked up to 10.3% in October from 10.2%.

Italian unemployment rate was declining throughout most of 2011 from 8.7% to Augusts' 7.9%. However, as conditions started to deteriorate it has risen sharply over the past two months and reached 8.5% in October from 8.3% in September.

Swiss KOF leading indicator index has been declining steadily over the past seven months and dropped again in November, this time to 0.35 from October's 0.75 (2-yr low) CHF first came under pressure but rose significantly as risk aversion disappeared.

Eurozone has also agreed to release the sixth tranche or financial aid to Greece and the funds should start arriving to Greece by the middle of December. EURUSD did not react much to this news as the attention has shifted away from Greece to Italy and other core Eurozone countries.

The New York session will start at 8:15 am ET with November ADP report that is expected to improve to 131K from previous 110K. Chicago PMI is due at 9:45 and is seen marginally higher in November at 58.5 from October's 58.4. October pending home sales are due 15 minutes later at 10:00 am and are anticipated to rise 1.4% after falling -4.6% in September.

Market volatility is likely to also increase at 2:00 pm when FED's Beige book is due.

CAD traders await September GDP due at 8:30 am which is expected to remain at 0.3% m/m and rise 2.7% from 2.4% y/y.

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