China Cuts Rates, Euro Shorts Unsqueezed

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.