Forex volatility presented higher again Friday night as Chinese credit profligacy launched a worldwide risk rally. DXY sagged and EUR jumped, or perhaps that should be the other way around:
Australian dollar jumped out of its free fall:
All commodities popped:
EM stocks were dragged back from the precipice:
Junk too:
The curve steepened:
Driving stocks to record closes:
Both stronger than expected Chinese credit for June and the move by the PBoC to cut reserve ratio requirements by 50bps catapulted everything out of the building deflationary shock manifest last week. The Australian dollar included.
China reserve ratio requirement joy
There is a lot less than meets the eye here. As I noted last week, RRR cuts tend to arrive as the threshold of major economic slowdowns and do very little to turn around that slowing. There are even more reasons than usual to suspect that this round of cuts will be less than useful to growth (which I go into in other posts this morning).
RRR cuts are best viewed as components in a process of Chinese easing (tightening). They represent the hope by Chinese authorities that they can handle this slowdown without doing much, that their deleveraging project remains on track, that reform is working, and everything is under control in the rebalancing.
This is a complete delusion, of course. No doubt the PBoC doesn’t believe it itself but it has to pretend that it does to please the Emperor until he too panics.
Ahead then, RRR cuts will fail to turn domestic demand. As we move through H2, the US fiscal cliff will arrive and the global inventory supercycle collapse, both landing on Chinese external demand. Then the PBoC will be forced into much more substantial easing. I am now looking for outrate cash rate cuts before year-end. And not too long after that, perhaps Q1 2022, a wholesale panic by the Emperor and MOAR of the usual building stimulus.
We have seen this process play out repeatedly since the GFC, 2012, 2015 and 2018. The following chart of China’s effective cash rate shows that rate cuts have always followed RRR cuts (they did so in 2012 as well but the chart does not go back far enough):
Set your watch by Chinese cash rate panic
This is going to be bad for the yuan which has already begun to fall and can go a lot further as capital flees:
CNY follows cash rate movements
As we know, the AUD follows the CNY like a lost puppy:
AUD and CNY joined at the hip
In short, sell any AUD rebound until Emperor Xi panics.
