Intraday Market Thoughts

China Cuts Rates, Euro Shorts Unsqueezed

by Adam Button
May 10, 2015 23:19

China cut deposit rates on the weekend after CPI numbers fell short of estimates. The Australian dollar is slightly higher at the open in response; last week the pound led while the kiwi lagged. Weekly CFTC positions showed some radical changes – except in crowded euro shorts.

China cut rates for the third time in six months on the weekend. The one-year lending rate was lowered a quarter-point to 5.10% with the deposit rate cut by the same amount to 2.25%. The moves came after April CPI was at 1.5% y/y compared to 1.6% expected.

 The PBOC has used a variety of tools to stimulate the economy in the past six month but the most-powerful is cutting the Required Reserve Ratio, which was undertaken in February. The Shanghai Composite rallied nearly 50% after the Feb 4 RRR cut before stumbling 5.3% last week.

The “economy faces relatively large downward pressure,” the PBOC said. “The overall inflation level is low, the real interest-rate level is above the historical average, for which there was room to use the interest-rate tool.”

Those comments indicate more easing could be coming. With rates still above 5% and the RRR relatively high, the PBOC has plenty of ammunition.

Traders will have a chance to digest have a light slate of economic data. The lone notable release is Australia NAB business confidence at 0130 GMT. The prior was +3.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR -190K vs -198K priorJPY -31K vs -5K priorGBP -25K vs -34K priorAUD +1K vs -27K priorCAD -10K vs -21K priorCHF +5K vs +1K prior

Australian dollar shorts cleared out after the RBA rate cut in a sign that traders believe the RBA easing cycle is in a medium or long-term pause. What jumps out is how little the Aussie was able to rally last week given that change in sentiment. It may be a signal about the amount of residual selling pressure.

What really grabs our attention was the rush into yen shorts. There was no clear catalyst for the shift and USD/JPY remains well-within its recent parameters.

Even that lack of worry among euro shorts (although they may have been squeezed later in the week), shows that by-and-large, dollar bulls remain confident.

Act Exp Prev GMT
NAB's Business Confidence (APR)
3 May 11 1:30

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