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20 Apr 2015
PBOC RRR cut to boost AUD, NZD for a while - ANZ
FXStreet (Bali) - The Research Team at ANZ shared their take on the latest PBOC RRR cut of 1% over the weekend, noting that the news are likely to boost the NZD and AUD for a while.
Key Quotes
"With the exception of a small hiccup around 2008, ‘bad’ news has been ‘good’ news for markets for around 15 years now, and central bank easing is the best news of all. The surprising 100bps cut in the Reserve Requirement Ratio by the People’s Bank of China (the biggest since, gulp, 2008) to 18% suggests two things."
"First, the authorities are frustrated by the high real interest rates being faced by Chinese enterprises. And second, the PBOC must not like what is sees as the path for GDP growth and inflation over the coming months and quarters. So what will the impacts be? The RRR cut was much bigger than the market anticipated, with the aim of forcing banks, awash with liquidity, to lend more to the real economy at a lower interest rate, boosting investment growth and the housing market (and by association iron ore and copper prices)."
"Will it work? Yes, it will have an impact, though the impact of a boost when you’re on a slide can be hard to spot. However, there was a telling anecdote in the Chinese media last week: several banks are declining to match the central authorities’ easier deposit requirements for second houses. Banks can at some point simply decline to expand lending, at which point the upper limits on lending quantities become just as irrelevant as its price – and monetary policy finds itself pushing on a string."
"But for now, it’s ‘good’ news, and is likely to boost the NZD and AUD – for a while. China’s equity market will be another beneficiary of the cut. It’s already red-hot, with authorities announcing tougher regulations on Friday. Under the load of what’s already an exorbitant amount of debt across the economy, the policy trade-offs are becoming increasingly stark – also on the exchange rate, where the economy needs a weaker yuan, but unhedged USD corporate debt exposures are a key vulnerability."
Key Quotes
"With the exception of a small hiccup around 2008, ‘bad’ news has been ‘good’ news for markets for around 15 years now, and central bank easing is the best news of all. The surprising 100bps cut in the Reserve Requirement Ratio by the People’s Bank of China (the biggest since, gulp, 2008) to 18% suggests two things."
"First, the authorities are frustrated by the high real interest rates being faced by Chinese enterprises. And second, the PBOC must not like what is sees as the path for GDP growth and inflation over the coming months and quarters. So what will the impacts be? The RRR cut was much bigger than the market anticipated, with the aim of forcing banks, awash with liquidity, to lend more to the real economy at a lower interest rate, boosting investment growth and the housing market (and by association iron ore and copper prices)."
"Will it work? Yes, it will have an impact, though the impact of a boost when you’re on a slide can be hard to spot. However, there was a telling anecdote in the Chinese media last week: several banks are declining to match the central authorities’ easier deposit requirements for second houses. Banks can at some point simply decline to expand lending, at which point the upper limits on lending quantities become just as irrelevant as its price – and monetary policy finds itself pushing on a string."
"But for now, it’s ‘good’ news, and is likely to boost the NZD and AUD – for a while. China’s equity market will be another beneficiary of the cut. It’s already red-hot, with authorities announcing tougher regulations on Friday. Under the load of what’s already an exorbitant amount of debt across the economy, the policy trade-offs are becoming increasingly stark – also on the exchange rate, where the economy needs a weaker yuan, but unhedged USD corporate debt exposures are a key vulnerability."