Financial markets are buzzing as the new trading week begins, with a distinct risk-on feel after the 100 basis point cut to the reserve requirement ratio (RRR) from the People’s Bank of China (PBoC) on the weekend. While the move to cut the RRR was not unexpected given the pledge from Chinese policymakers to actively ease monetary policy if the drag on economic growth began to raise concerns of a hard landing, and thus a risk to the official GDP target of 7.0%, it was the size of the cut that took markets by surprise. The full percentage point cut will unleash roughly CNY 1.2trn of liquidity into financial markets, with the government hoping the increased access to capital will stimulate growth and help the Chinese economy achieve what is likely to be a tough GDP target. The slash to the RRR helped the Shanghai Comp offset some of the losses experienced after Friday’s close when Chinese regulators announced they would be tightening rules on margin lending and increasing the number of equities that can be shorted, though the regional equity index wasn’t able to push itself back into positive territory, finishing its session lower by 1.61%.
Commodity-linked currencies were initially bid-higheron Sunday night when markets re-opened for trading, though the positive effects have since faded as participants try to decipher whether the RRR cut is prudent treatment given economic conditions, or if the flu-like symptoms the Chinese economy is experiencing has the potential to escalate into something far more drastic. After breaking into the mid-0.78s against the big dollar overnight, the aussie has settled back to essentially an unchanged print heading into the North American open, with AUDUSD trading on the south side of the 0.78 level.
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