China rate cut not substantial enough

BY Janne Muta

|June 20, 2023

China cut key lending rates for the first time in 10 months on Tuesday. However, the easing measures were not as substantial as anticipated. Worries around the property market and the overall slowdown in the economy keep pressure on the commodities markets.

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The rate cuts are aimed at reducing the expenses associated with new loans and interest payments on existing loans. But as the business dwindles, many companies are not focusing on expanding their operations. Instead, their priority lies in obtaining loans to repay their existing debts.

At the beginning of the year, there was widespread optimism about a significant rebound in global demand following China's decision to abandon its zero-Covid policy. However, now the slowdown in the Chinese economy is so severe the authorities have to cut rates and quite likely inject more stimulus into it. USOIL has reacted negatively to the rate hike as the market participants looked for a more decisive action from Beijing and the commodity currencies are losing ground.

The minutes from the RBA’s June meeting revealed that the decision to increase interest rates had been a close and uncertain one. This has weighed on the AUD and the AUDUSD pair is down by -0.80% at the time of writing this. Market participants had to adjust their positions in light of the reduced likelihood of a July rate hike.

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After rallying strongly last week EURUSD has now lost momentum. If the dollar buying that was triggered by the Fed rate hike expectations is sustained, the market could trade lower. Below 1.0946 the market could move to 1.0870 and then possibly to 1.0820 on extension. Above 1.0946, we might see a move to 1.0998.

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Weakness in China coupled with the RBA minutes showing the central bank was uncertain about the next rate hike brought AUDUSD lower. The pair is bearish below 0.6855 and could trade down to 0.6750. Above 0.6855, the market could move to 0.6880.

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Policy divergence between the BOE and the RBA is driving GBPAUD higher. The market is bullish above 1.8650 and could move to 1.8980. Below 1.8650, look for a move to 1.8560.

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The ECB is expected to hike once more but RBA clearly isn’t so sure. Therefore EURAUD is trading higher. The market is bullish above 1.5926. Below the level, the market could trade down to 1.5900. Above the 1.5926 level, look for a move to 1.6150 and possibly to 1.6260 on extension.

The next main risk events

  • GBP - CPI
  • CAD - Core Retail Sales
  • CAD - Retail Sales
  • USD - Fed Chair Powell Testifies
  • CHF - SNB Monetary Policy Assessment
  • CHF - SNB Policy Rate
  • USD - FOMC Member Waller Speaks
  • CHF - SNB Press Conference
  • GBP - MPC Official Bank Rate Votes
  • GBP - Monetary Policy Summary
  • GBP - Official Bank Rate
  • USD - Unemployment Claims
  • USD - Fed Chair Powell Testifies
  • USD - Existing Home Sales
  • GBP - Retail Sales
  • EUR - French Flash Manufacturing PMI
  • EUR - French Flash Services PMI
  • EUR - German Flash Manufacturing PMI
  • EUR - German Flash Services PMI
  • EUR - Flash Manufacturing PMI
  • EUR - Flash Services PMI
  • GBP - Flash Manufacturing PMI
  • GBP - Flash Services PMI
  • USD - Flash Manufacturing PMI
  • USD - Flash Services PMI

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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