On Friday, China’s central bank announced an interest rate cut for the 6th time since November 2014. The reserve requirement ratio (RRR) for banks was also cut.
In another effort to jumpstart its slowing economy, the one-year benchmark bank lending rate was reduced by 25 basis points to 4.35 percent. The RRR was cut by 50 basis points for all banks, taking the ratio to 17.5% for the country’s biggest lenders.
The US Federal Reserve’s decision last month not to raise interest rates gave China’s government the opening to cut theirs. Lower bank reserve requirements should flood the market with more liquidity, making it easier for small and medium-sized enterprises (SMEs) to get credit. This would in turn spur a certain level of economic and employment growth in China.
The main reason for the rate cut was China’s slowing growth. Recent reports show that China’s growth fell to a six year low of 6.9 percent, largely due to a steep decline in exports.
World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.
The news of China’s easing was received with cheers. Global markets surged, with US and European stocks posting significant gains. On Monday morning, the FTSE China A50 Index futures for October delivery climbed 1.4 percent.
The Shanghai Composite has rebounded 17 percent from this year’s low on 26th August while the Hang Seng China Enterprises Index has climbed 18 percent from its 7th September low.
The mood was slightly different in the currency market though.
The AUD/USD initially shot up after the announcement, touching a one week high of 0.7296. However, it quickly erased its gains and headed south as traders priced in the possibility of the Reserve Bank of Australia (RBA) following the footsteps of the People’s Bank of China (PBOC).
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AUD: CPI q/q. Wednesday 28th October, 8.30am.
I expect figures to come in at 0.6% (previous figure was 0.7%).
USD: Advance GDP q/q. Thursday, 29th October, 8.30pm.
I expect figures to come in below 2% (previous figure was 3.9%).
CAD: GDP m/m. Friday 30th October, 8.30pm.
I expect figures to come in at 0.1% (previous figure was 0.3%).
Long USD/CHF at 0.9740
On the H1 chart, USD/CHF has trended up about 300 pips in the last one week, aided by China’s rate cut on Friday which caused some dollar strength. USD/CHF is retracing from its one month high of 0.9800 and will probably fall lower to the next support level of 0.9740.
We will go long as we expect the upward momentum, of USD/CHF to continue. We will go long once prices touch 0.9740. A stop loss of 35 pips is placed below the last low and we will have two targets on this trade, exiting the first position at 0.9775 and the second one at 0.9810.
Entry Price = 0.9740
Stop Loss = 0.9705
1st Profit = 0.9775
2nd Profit = 0.9810