Afternoon analysis 25.08.2015:
The PBOC decided to cut interest rates and reserve requirement ratio. Solid data from the US should support the dollar, but the market focuses much more on the recent volatility. The zloty remains fairly stable.
Chinese authorities return to well known tools
Around midday the People's Bank of China (PBOC) cut interest rates from 4.85% to 4.6%. The move wasn't unusual, especially when taking into account that both core and headline inflation remain below 2%. The Monetary Policy Committee still seems to be quite restrictive especially considering the overall loose approach by central banks around the world.
Additionally, the PBOC cut the reserve requirement ratio from 18.5% to 18% which, according to the Bloomberg calculations, should free up about 100 billion in liquidity by the Chinese commercial banks. Both decisions should be regarded as positive.
Firstly, due to the fact that they should help the economy. Cheaper credit for both companies and households is expected to push investments and consumption. Another aspect is more psychological. It means that Beijing is returning to the well-known methods to manage the economy and is going to withdraw from currency changes or direct engagement to the stock market.
If the PBOC actions calm investors on capital markets the previous trends on currencies may return. Mainly the EUR/USD should come back to gradual depreciation. Some investors can return to “risk on” trades and initiate carry trade financed in the euro, which should be a negative message for the common currency.
Also, the rate hike discussion in the US may be more visible again. If the threat of more turmoil in Asia diminishes then the Federal Reserve should resume discussions on monetary tightening. Currently, the September decision is not the base case scenario but December is still in the game. As a result, it may push the dollar higher in Q4.
The macro economic readings which were published in the afternoon should also be positive for the dollar. New home sales in the US was close to the consensus and the consumer confidence index rose to 101.5 points which was the second best publication since 2007.
The zloty should remain stable
The base case scenario for the zloty is stable trading. In the early afternoon there was an attempt to fall below 4.21 on the EUR/PLN but the move wasn't successful. However, the odds for a EUR/PLN slide to around 4.20 by the end of the week should remain a preferable scenario if the western capital markets calm down.
The situation looks similar on the franc. Levels around 3.90 should remain the base case scenario on the CHF/PLN. On the other hand, the view on the USD/PLN can look different. When the US equities finish the following days on solid gains the discussion regarding an interest rate hike can return and push the USD/PLN towards 3.75.
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