The China Question

China announced a surprise rate cut on Friday but the big question now is whether it was a one-off or the start of a rate cutting cycle. The euro is soft early in early trading; last week the loonie led the way while the yen lagged. Weekly CFTC data shows a buildup in yen and sterling shorts.  Friday's higher than expected Canada CPI drew our GBPCAD Premium short closer to the final target. EURGBP and USDCAD remain in progress.

The implications of whether China's move on rates is the start or end of a program are enormous. In reports on Friday it was characterized as a quick liquidity move but an exclusive report from Reuters on the weekend said top officials were more open to further loosening because of disinflation fears.

While most central banks are essentially out of ammunition to fight economic malaise, China has a multitude of weapons it can still deploy. If they move in that direction, the commodity currencies in particular stand to benefit, especially AUD.

On the flip side, AUD could face some early selling pressure because of a BHP Biliton announcement to cut $13b in capital spending planned for 2016.

The early move in FX is to sell the euro in a continuation of Friday's selloff. There is a risk the market is overly excited about Draghi's latest comments. His hints at QE were highly conditional and although his tone was slightly more overt, he's said before that the ECB is prepared to use more tools.

The Asia-Pac calendar is quiet to start the week.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -169K vs -164K prior

JPY -92K vs -83K prior

GBP +23K vs +13K prior

AUD +38K vs +38K prior 

CAD +20K vs +22K prior

CHF -22K vs -23K prior

NZD -1K vs -1K prior

The two notable moves this week were yen and sterling selling. A rise in yen shorts is long overdue but showed that specs just couldn't find a good dip to buy – no one likes to chase. In cable, the market is getting the sense that Carney's rate hikes might be a long way out.