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China on the tear (part 2)

CMC Markets

Traders in China may have a reason to cheer when markets re-open for trading on Monday. Moves last Saturday by the People’s Bank of China (PBOC) may have just provided further fuel to the rally of Chinese stocks. The PBOC announced cuts of 25 basis points to both lending and deposit rates with immediate effect. The one-year benchmark lending rate will ease to 5.35% while corresponding deposit rates will drop to 2.5%. As highlighted previously, the PBOC (versus other central banks) is privileged with having a wider array of options and a greater depth in its arsenal to fight deflationary forces in the domestic economy. Slightly surprising, however, is the determined pace with which new measures have been introduced in these past six months. The PBOC has alternated between cutting both interest rates and the bank’s RRR levels in quick succession since November.

Unnatural pace of easing

Is this ‘unnatural pace’ of easing a signal to economists that they should perhaps realign their growth expectations downwards for the Chinese economy? On Sunday past, it became clear that China’s growth is still in a mode of deceleration, when February’s PMI came in at 49.9. Although it was better than analysts’ expectations of 49.7, this reading below 50 shows that manufacturing is still contracting in China. More clues would be offered this Thursday when the NPC (National People’s Congress) meets and is scheduled to announce its growth targets for 2015. We are merely two months into 2015. Already 21 central banks around the world have eased monetary policies. The race to be a “first mover”, to cut rates, continues as bankers globally juggle to manage their bank policies against the quickening deterioration of their respective economies. Certainly, it would be interesting to be able to read Ms Yellen’s thoughts now as she ponders a US rate hike later this year!

Looking ahead

Watch for possible action this week on the A50 stock indices, such as a convincing break above the key resistance of 11,100, failing which a retest of the 10,500 recent lows. Also pairs on ‘commodity currencies’ like AUD/USD and CAD/USD. Action will also be focused on the EUR/USD as the European Central Bank commences its QE program of E60 billion this month.
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