Australian and New Zealand Dollars Rise as China Cuts Interest Rates

Talking Points:

Aussie and NZ Dollars Rise After Surprise Round of PBOC Interest Rate Cuts
US Dollar Pulls Back After Seven Days Of Gains on FOMC Pre-Positioning
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The Australian and New Zealand Dollars outperformed following an unexpected round of PBOC interest rate cuts. China’s central bank cut rates for the sixth time in a year, lowering the one-year lending and deposit rates by 25bps to 4.35 and 1.5 percent, respectively. The reserve requirement ratio for all banks was also lowered by 50bps, with an additional 50bps reduction for select lenders.

Traders likely interpreted Chinese stimulus expansion as supportive for Australia and New Zealand’s own growth prospects, which could limit the scope for RBA and RBNZ easing, since the East Asian giant is a leading export market for both countries. Greater accommodation in the world’s second-largest economy likewise fueled risk appetite, amplifying upside pressure on the sentiment-linked Aussie and Kiwi Dollars. The MSCI Asia Pacific regional benchmark stock index rose 0.3 percent.

Looking ahead, the chipper mood may struggle for follow-through as traders opt to withhold directional conviction ahead of Wednesday’s much-anticipated FOMC monetary policy announcement. While Janet Yellen and company are unlikely to begin stimulus withdrawal this time around, the tone of the statement accompanying the rate decision is widely expected to set the tone for December’s sit-down. If tightening in 2015 is truly on the agenda as many FOMC members have suggested, hawkish commentary setting the rhetorical foundation for liftoff may sink risk-sensitive assets.

In fact, FOMC pre-positioning seems to be at work already. The US Dollar traded broadly lower in a move that probably reflected a rebalancing effort ahead of the announcement after the greenback finished last week with seven consecutive days of gains, its longest winning streak in nine months.

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