China Lowers Rates, Fear Trade Retreats

The PBoC lowered their benchmark lending rate by 25 basis points to 6.31% on Thursday.  This was the first such rate cut in nearly four years.  In addition the deposit rate cap was lowered to 3.25% and banking reforms designed to curtail excessive speculation were placed on hold until 2013 to help support bank liquidity.  In response, the markets all responded favorably, giving wings to the short-covering rally in the forex markets.

The Japanese Yen (AMEX:FXY) fell versus the U.S. Dollar as well as both the Euro (AMEX:FXE) and the Yuan.  That is how far the fear trade had been pushed last week, the PBoC began easing and still the Yen fell versus it.  This was I’m sure welcomed by the Bank of Japan who now does not have to intervene in the currency markets and can continue their asset purchase program to lengthen the maturity of their bond portfolio out in time.  this rally in the U.S. Dollar I am sure has been met with strong selling by those looking to diversify, i.e. China, Japan and the rest of the BRICS nations, their reserves.

What is interesting in today’s action was the unwinding of the fear trade in the major southeast Asian currencies, namely both the Singapore Dollar (SGD) and the Malaysian Ringgit.  Both of them have completely reversed their deprecation versus the Yen and the Dollar but have only seen mild short covering versus the Euro.  Watch the Singapore Dollar / Euro cross as Singapore has fairly large exposure to European banks but it looks like it it mostly German debt as the SGD has been appreciating versus the Euro since the Greek elections. Malaysia (AMEX:EWM) in particular has diversified their trade away from Europe.

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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