China's Big RRR Cut, NZ CPI Next

A Chinese interest rate cut isn't a surprise but a full percentage point in the required reserve ratio for large banks is a dramatic step. We warned about a cut last week and we now look at the implications. Last week the US dollar fell more than 1.2% against every G10 currency and it starts the new week generally lower. The immediate focus will be on whether the cut is interpreted as reason for excitement or for concern. NZ Q! CPI is next, exp at 0.2% q/q from 0.8%.

The full percentage point cut in the RRR to 18.5% is the largest cut in 7 years and follows a half-point cut in February. Village banks and smaller credit unions were allowed to ease an additional 100 basis points to in order to stimulate rural growth. It comes after Chinese officials tightened stock market margin trading requirements late on Friday in a move that sent Chinese-listed ETFs down 5%.

In most case, a rate cut would be cheered by markets but China is an opaque economy and it may raise concerns that the PBOC is attempting to arrest a more dramatic slowdown. The statement touched on those fears, saying that although growth met official targets, retail sales and industrial production numbers point “cause concern.”

The playbook for most of the past decade has been to buy AUD on good Chinese news but that hasn't worked over the past year as China moves away from a model based on construction/investment and more towards a consumer economy. The early reaction in markets has been a half-cent rally in AUD/USD but it bears watching closely and continued gains aren't guaranteed.

China will dominate the conversation on Monday but in the background, the worries about Greece are escalating as Tsipras digs in his heels on labour and pension reform. A quip from Draghi may also do the rounds at some point; “It is pointless to go short the euro,” he said. The context was in relation to betting on a breakup of the Eurozone but the words could be an excuse for a bid/squeeze higher in the euro early in the week. If so, it may prove wise to fade it because there is no threat of action behind his comment.