The PBoC may do what the ECB and Fed didn’t

First it was the Fed dominating the headlines and then the ECB stepped into the limelight, now investors are looking towards the PBoC. Will Beijing do what the other policy makers refuse to - attempt to stimulate growth – or is the market setting itself up for further disappointment? No matter what China decides, it is clear the market was stung by the ECB’s and Fed’s decisions not to act. In fact, most major equity markets have almost completely retraced their gains in the lead up to the central bank meetings this week. But this is to be expected considering those gains were underpinned by expectations of more growth stimulating policies/measures/programmes. So, what is the market expecting of the PBoC?

Judging by the Chinese central bank’s Q2 monetary policy implementation report, released earlier this week, the market can expect Beijing to adjust policy when needed to stimulate growth. But this will only happen so long as inflation and property prices remain under control. The bank also warned that the impact of expansionary policy may wane in stimulating growth. Nonetheless, we are expecting the PBoC to cut the reserve requirement ratio (RRR) at any time, followed up by some more RRR cuts down the road as well another IR cut. Combined with prior moves aimed at stimulating growth these expected policy adjustments should help China turn around its growth slowdown, eventually leading to an overall GDP growth rate this year of around 8%. The end result should be a positive boost for commodity based economies like Australia’s. Yet, with so much uncertainty surrounding the European debt crisis and the stalling US recovery, the effect on price action of further China easing may be short-lived.

Interestingly, China official non-manufacturing PMI dropped to 55.6 from 56.7, whilst HSBC’s services PMI increased to 53.1 from 52.3. The jump in different directions is causing some commentators to question the reliability of either figure. No matter, the manufacturing PMI figure is what the market is really interested in. But the official figure and HSBC’s figure for this also went in opposite directions during July…

Nonetheless, price action in the FX market was very interesting and jumpy, with the kiwi pushing to pre-ECB levels against the USD dollar and AUDNZD hitting a two-week low. The push higher for the kiwi started around 10:30AEST on the back of a broad USD sell-off, before the pair was further bolstered by news that S&P confirmed New Zealand’s rating. The pair finally ran into some resistance around a proven resistance level: 81.35.

Elsewhere, price action was fairly muted in the lead up to the release of NFP data tonight which has the ability to significantly impact the Fed’s decision on whether to engage in another round of QE and, therefore, price action. Current estimates put the headline figure around 100K - pretty weak - but if the figure prints significantly below/above this level we expect USD to push lower/higher.

Источник: Forex.com

03.08.2012