Moves by China to cut the cost of borrowing have stabilised the commodity currency family.
The Australian dollar, New Zealand Dollar, Canadian Dollar, South African Rand and others in the commodity currency grouping were the immediate winners of an interest rate cut and monetary stimulus announcement from China.
The moves comes as the world's number 2 economy seeks to put a floor under recent declines in the rate of growth in economic activity and falling markets.
China announced on Wednesday that 21.8 BN USD would be made available to the interbank money market.
The move follows the People’s Bank of China (PBoC) cut to the base lending rate for the 5th time since November 2014 on Tuesday.
The basic rate was cut 50 basis points and the 1-year lending deposit rate was cut 25 bps to an effective 4.6%.
The pound has seen much of those recent gains against the commodity dollar family of currencies slip away as a result.
"The immediate impact has helped to strengthen the rebound in European equities and US futures. The USD caught a small bid, though the Antipodean currencies have also rallied on the news," say TD Securities in reponse to the news.
The PBoC also noted that policy will need to be “flexible” which TD Securities believe signals further easing.
The question now is whether this will impact diminished expectations for a September hike by the Fed. Stay tuned.
The outlook for the commodity complex against the pound and USD now appears to be increasingly enslaved to further movements at the Chinese central bank.
The PBoC has the Ammunition to Cut Again
"The market is looking for some strong signs that China has enough ammunition and more importantly it is willing to use it effectively to weather this storm. The cut of interest rates by 0.25 per cent and lowering the bank reserve requirement ratio by 0.5 per cent may calm the stock market turmoil, but does not address the underlying causes,” warns Kamel Mellahi, of Warwick Business School.
Mellahi is Professor of Strategic Management and researches emerging markets.
According to Mellahi yhe devaluation of the yuan, a decline in exports, and multiple signs that China's economic pulse is slowing down at a much faster pace than expected have created a toxic cocktail, fuelling uncertainty and eroding confidence in the turnaround of the Chinese economy.
The Chinese economy has hit some rough weather for sure. But is it a passing storm?
“I think so. What we are seeing now is a dress rehearsal of things to come. The Chinese economy is going to be on this bumpy road for a while and it will have ebbs and flows that will no doubt have a serious impact on the global economy,” says Mellahi.
The devaluation of the yuan was widely perceived as an export boosting measure to aid economic growth, which only fuelled concern about the health of the Chinese economy.
But the devaluation may not be sufficient enough to boost export demand enough to achieve this year's seven per cent growth target.
Looking ahead to the potential for further PBoC action Mellahi says:
“With $4 trillion of bank deposits, China still has the financial firepower to alleviate market pressure. But the Government’s reluctance to initially interfere aggressively to calm markets around the world suggests that China has finally decided to let market forces play a bigger role in deciding the value of the currency.
"China is concerned that aggressive interference in the market may sow the seeds for future problems especially worsening the credit growth which is already high and could go out of control."