Greek And Chinese Forces Drive Markets On Monday

The US dollar is firmer against most of the European currencies but is weaker within the dollar-bloc and many emerging market currencies.  Against the yen, the greenback is little changed.  

The US dollar has been pushed a more than a cent off the $1.0850 level approached before the weekend. Sterling’s push toward $1.5050 is a distant memory as it retreats to $1.4900 support.  

China’s 100 bp cut in required reserves failed to fully offset the other measures announced, including the crackdown on margin, allowing fund managers lend shares and increasing the equities that can be shorted. This follows the launch of two new equity indices that offer opportunities for portfolio insurance. China’s equity markets were off 1.65-2.0% today. The Hong Kong Enterprise Index that tracks Chinese companies that trade in HK was off by nearly 3%, less than what some had feared before the weekend. 

The financial market moves are savvy. With the Shanghai Composite up 79% over the past six months (Shenzhen Composite up 56%) and valuation metrics stretched, Chinese officials are right to develop such tools. Time is of the essence.   

The cut in reserve requirements is a different story. It is about the deterioration in economic conditions understood to include the capital outflows China is experiencing. The move is estimated to free up a trillion yuan of liquidity, but given the outflow, this is being understood as reactive. Chinese officials have also indicated they are exploring a long-term loan facility to banks. Details are sketchy but it seems more like the ECB’s TLTROs than LTROs. The idea is to boost lending in specific areas, such as agriculture, affordable housing and small businesses. A key take away point is that Chinese officials seem committed to taking more measures to ensure the economy is not decelerating too quickly. 

We note that the dollar-bloc currencies are faring better than the Europe. The Chinese stimulus, firmer oil prices, and constructive price action last week helped blunt the impact of softer New Zealand inflation ( -0.3% in Q1 and 0.1% year-over-year down from 0.8% in Q4 14) and concerns about Australia’s CPI report on April 21. The pendulum has swung away from an RBA rate cut next month, but sentiment is fickle. Tomorrow’s release of the RBA minutes and Wed’s CPI report will likely impact expectations. The Aussie could not extend last week’s gains that saw it poke just above $0.7840. The US dollar is consolidating inside its wide pres-weekend trading range against the Canadian dollar.