Monday AM: GBP Solid on Weekend Headlines | AUD and NZD Supported as China cuts RRR

Image © kasto, Adobe Stock

Global sentiment is firm at the start of the new week as markets digest the weekend move by China's central bank to cut the level of cash that banks must hold as reserves.

The reserve requirement (RRR) cut, the fourth by the People's Bank of China (PBOC) this year, is a sign authorities are keen to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

The government has meanwhile pledged to expedite plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further, with investment growth slowing to a record low.

Reserve requirement ratios (RRRs) - currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks - would be cut by 100 basis points effective October 15, the PBOC said, matching a similar-sized move in April.

The news has ensured the Australian and New Zealand Dollars are strong at the start of the new week - both currencies tend to be quite sensitive to developments in China which is the largest export destination for New Zealand and Australian goods.

Expectations for a cooling in the Chinese economy have impacted negatively on NZD and AUD over recent months. The moves announced today will unlikely be a game changer for China, but economists do expect further measures to be announced in order to provide support for the Chinese economy, which should in turn provide some support to NZD and AUD.   

GBP

Sterling starts the new week defending recent gains amidst ongoing expectations that the E.U. and U.K. will agree a Brexit Withdrawal Agreement by year-end.

The data calendar is empty for Sterling and we therefore will likely see technical considerations and broader sentiment take the steering wheel.

European Council President Donald Tusk said on Saturday it was possible to agree a deal by the end of 2018.

Speaking on the sidelines of a conference in Krakow, Poland, Tusk said: "We will try for it in October... and I think there is a chance to have an accord by the end of the year."

The President of the European Commission, Jean-Claude Juncker, meanwhile said on the weekend he is sure a Brexit agreement could be reached in November, if not sooner.

Juncker told three Austrian newspapers that Brexit without a deal "would not be good for the UK, as it is for the rest of the union".

He added:

"I assume that we will reach agreement on the terms of the withdrawal agreement.

"We also need to agree on a political statement that accompanies this withdrawal agreement - we are not that far yet.

"I have reason to think that the rapprochement potential between both sides has increased in recent days, but it can not be foreseen whether we will finish in October.

"If not, we'll do it in November."

This week we await new plans concerning the question of the future of the Irish border from the U.K. and Europe's initial response to the plans could well move Sterling.

USD

The calendar for the U.S. Dollar is empty today and market attention will be on Wednesday's PPI inflation and Thursday's CPI inflation releases.

If the data beats expectations the USD could enjoy another positive week.

The IMF is today expected to downgrade its global economic growth outlook largely because the risk from more protectionist trade policies and tighter financial conditions have begun to materialise.

"The USD tends to do well when global economic activity softens," says Joseph Capurso, Senior Currency Strategist with Commonwealth Bank of Australia.

EUR

The Euro could well be prone to headlines concerning Italy standoff with the E.U. over its plans to significantly increase its budget deficit through increased social spending and tax breaks.

"The E.U. is expected formally to give their views next week, though leaks to the media are likely this week.  We expect the EU to push back against the Italian government proposals," says Capurso.

The Italian government released its new fiscal strategy, which probably left investors with more questions than before .

Political tensions between the European Commission and Italy are growing as Deputy PM Di Maio dismissed concerns on Sunday that the current budget pointed to a significant deviation from the agreed fiscal path.

The current stand-off between Italy and the Commission has led to renewed pressure on Italian government bond yields as well as the Italian equity market.

Advertisement
Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here