25 Aug 2015
China to cut RRR? Implications for the Antipodes - Deutsche Bank
FXStreet (Bali) - According to Deutche Bank, a large RRR cut by China would strengthen the AUD not only against USD but also against NZD, while a smaller cut would harm them equally.
Key Quotes
"As Chinese and global equity markets continue to hemorrhage, all eyes are on the PBoC. Further stimulus appears necessary in Q3 and likely as early as this week. It would likely take the form of a RRR cut.
What would that mean for the Antipodes?"
"We argued earlier this year that RRR cuts tend to weaken the Antipodes over the course of a month, despite boosting them for a day or two. Our model missed a nuance, however, that may become
crucial: the Antipodes' betas to RRR changes are positive but rapidly decrease in a non-linear fashion."
"Hence, a 50bp RRR cut would weaken both AUD and NZD, but a 100bp cut would strengthen them. In fact, for the NZD the non-linearity is insignificant and smaller than for AUD. This means that a large RRR cut would strengthen the AUD not only against USD but also against NZD; a smaller cut would harm them equally."
"This relationship may be even more pronounced in the current circumstances. The market awaits Chinese stimulus like the monsoon, and a mere 50bp cut to the RRR would come as a major disappointment."
"Much of the liquidity thus created would only compensate for the drain from the PBoC's currency interventions without significantly easing monetary conditions relative to the pre-devaluation period."
"As most of the market expects only one RRR cut in Q3, it would be far from clear that the PBoC would deliver further incremental stimulus in the coming weeks. A cut of at least 100bps is likely required to convince the market that the PBoC really intends to move ahead of the curve and boost growth meaningfully."
"In all, a 100bp RRR cut would be broadly consistent with our long AUD/NZD and short NZD calls; anything less would likely prolong both Antipodes' suffering."
Key Quotes
"As Chinese and global equity markets continue to hemorrhage, all eyes are on the PBoC. Further stimulus appears necessary in Q3 and likely as early as this week. It would likely take the form of a RRR cut.
What would that mean for the Antipodes?"
"We argued earlier this year that RRR cuts tend to weaken the Antipodes over the course of a month, despite boosting them for a day or two. Our model missed a nuance, however, that may become
crucial: the Antipodes' betas to RRR changes are positive but rapidly decrease in a non-linear fashion."
"Hence, a 50bp RRR cut would weaken both AUD and NZD, but a 100bp cut would strengthen them. In fact, for the NZD the non-linearity is insignificant and smaller than for AUD. This means that a large RRR cut would strengthen the AUD not only against USD but also against NZD; a smaller cut would harm them equally."
"This relationship may be even more pronounced in the current circumstances. The market awaits Chinese stimulus like the monsoon, and a mere 50bp cut to the RRR would come as a major disappointment."
"Much of the liquidity thus created would only compensate for the drain from the PBoC's currency interventions without significantly easing monetary conditions relative to the pre-devaluation period."
"As most of the market expects only one RRR cut in Q3, it would be far from clear that the PBoC would deliver further incremental stimulus in the coming weeks. A cut of at least 100bps is likely required to convince the market that the PBoC really intends to move ahead of the curve and boost growth meaningfully."
"In all, a 100bp RRR cut would be broadly consistent with our long AUD/NZD and short NZD calls; anything less would likely prolong both Antipodes' suffering."