Chinese policies are slightly negative in USD – ING

The top news this European morning is a package of monetary easing measures issued by the Chinese authorities overnight. These measures can be described as a monetary “bazooka”, but there is much to do to get Chinese demand back on its feet, notes Chris Turner, FX strategist at ING.

DXY to trade in a tight range of 100.50-101.00

“These measures produced decent gains of 3-4% in local equity markets and a similar jump in iron ore, seen as a key benchmark for the Chinese real estate sector. While in theory monetary easing should be negative for a currency, USD/CNH actually fell to a new low. This reflects both Chinese exporters late covering their dollar receivables and reassessing the China investment case, as well as investors being forced to reduce underweight China positions.”

“The Chinese measures add to the reflationary sentiment we discussed in yesterday’s FX Daily. This environment is characterized by steeper yield curves, higher equities and, as I pointed out yesterday, normally the benchmark reflationary currency pair, EUR/AUD, is moving lower. Indeed, EUR/AUD is down 1.3% in the last 24 hours. For the dollar itself, a reflationary environment is slightly negative as investors rotate into more pro-cyclical and EM currencies.”

“Given more manufacturing malaise expected out of Germany today and the heavy weight of the Euro in the DXY, this likely means the DXY continues to trade in a tight 100.50-101.00 range. However, if a recovery in Chinese domestic demand is the flavor of the day, expect currencies such as the South African rand, Brazilian real and Australian dollar to do well.”