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March 2016

The PBOC cuts the RRR rate by 0.5%

Published: Tuesday 01 March 2016

  • The PBOC cuts the RRR rate by 0.5%
  • Eurozone inflation drops 
  • RBA left the cash rate unchanged 
Yesterday the single currency lost ground as Eurozone inflation dropped to -0.2% year on year versus an expectation of a flat reading. Core inflation also dropped to 0.7% year on year versus expectation of 0.9%. That's the first negative reading in headline CPI since September last year and kept the Euro on the back foot. This drop in inflation strengthens the case for the ECB to add further stimulus when they meet next on the 10th of March. This was echoed by comments from ECB Governing Council member Ignazio Visco yesterday who said that downside risks have mounted and that inflation data, and in particular inflation expectations, are also discouraging. He added that the Bank would do what is necessary to respect its price stability mandate.

The PBOC surprised the market yesterday by cutting the RRR rate by 0.5%. As a result, the Yuan dropped to their lowest levels in three weeks in the aftermath of the announcement as Chinese officials continue to slowly devalue the currency. The easing of RRR rate may spur easier credit conditions but it is unlikely to fundamentally expand the demand for commodities, therefore the rallies in commodity currencies in the wake of this move maybe short lived.

Overnight China’s official PMI manufacturing dropped to 49.0 in February versus expectation of 49.4 as Chinese factories contracted for the seventh straight month and that's the weakest level since January 2009 – suggesting that the contraction is worsening.

Overnight the Reserve Bank of Australia left the cash rate at its record low 2 per cent which was universally expected. The central bank provided nothing new in the accompanying statement. Governor Glenn Stevens said benign inflation, moderating house price growth and Australia's successful transition away from mining investment made the case for interest rates to remain low. However, low inflation would also facilitate another cut if that were necessary.

Looking ahead we await manufacturing data from The UK , Europe and the United States however unless the data is markedly out of line with consensus, I would expect current trends to prevail as markets pause for breath ahead of the all-important ECB meeting on the 10th.

FX Research and Daily Currency Analysis with Denzil Rickerby

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