ECB and PBoC Easing: Bring it On!

There’s no denying that the past week was filled with lot of big market movers. And just when I though forex price action would calm down on Friday, it turns out the PBoC and the ECB dropped a couple of last-minute bombshells! Here’s what you absolutely need to know:

PBoC Surprise Rate Cut

Looks like People’s Bank of China (PBoC) ain’t happy about the ‘new normal’ in the Chinese economy! Central bank policymakers finally admitted that the world’s second largest economy badly needed stimulus, as they decided to cut the benchmark loan rate by 0.4% to 5.6% and the deposit rate from 3% to 2.75%.

Recall that PBoC Governor Zhou Xiaochuan and his men had been trying to avoid resorting to rate cuts in order to shore up economic performance, fearing that any form of policy easing would worsen the country’s debt problems. However, persistent economic disappointments and prodding from the government and corporate sector eventually convinced the PBoC to lower lending rates.

Even though PBoC officials stuck to their neutral bias and assured that China will return to a faster pace of growth soon, most market watchers believe that this is just a face-saving move for the central bank. Several economists still think that the country would miss its 7.5% annual growth target for the year.

ECB Governor Draghi Talks Stimulus

It ain’t over ’til Draghi says so! Even after the ECB already cut several interest rates twice this year, ramped up its LTRO program, and purchased more asset-backed securities, Super Mario stoked expectations of further stimulus by saying that they’re ready to do what must be done to boost inflation as fast as possible.

The threat of deflation and a potential recession have been looming over the euro region for quite some time now, but the fact that ECB Governor Draghi practically confirmed that they will ease again was enough to knock the euro out. Bear in mind that the ECB is set to have another monetary policy meeting in a couple of weeks and policymakers might take this opportunity to announce actual QE.

“If further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” declared Draghi.

What does this mean for forex price action?

What’s interesting about these easing-related announcements was that the PBoC rate cut triggered a bullish reaction from the Australian dollar while the ECB’s hints were received negatively by the euro. I’m not about to venture a guess on why this was so, but I think it could be indicative of longer-term price movements.

Stimulus for China seemed to revive risk appetite and demand for the commodity currencies, as market participants probably speculated that the rate cuts could eventually translate to renewed demand and stronger global growth prospects. With that, EUR/AUD, EUR/NZD and EUR/CAD saw multi-hundred pip losses and might be in for more.