Dollar stronger on China stimulus

The Australian dollar traded around its highest levels in a month today, supported by news of more stimulus for China’s economy.

The Australian dollar continued to trade around its highest levels in a month today supported by news over the weekend of more stimulus for China’s economy, and a widening view that an interest-rate cut locally may not be needed in May.

China’s central bank reduced the amount of reserves commercial banks are required to hold, freeing up about $200 billion for lending in the latest easing measure to shore up the world’s second-largest economy.

The People’s Bank of China’s one percentage point cut in the reserve requirement, announced last night, is a larger-than-usual reduction. It was the second cut in banks’ reserve requirement in less than three months and comes after the economy decelerated to 7 per cent year-over-year growth in the first quarter, the slowest pace in six years.

At 4pm (AEST), the Aussie was trading at US78.17, compared with US77.91 on Friday.

Elias Haddad, currency strategist at the Commonwealth Bank of Australia, said the size of the China cut was significant and a measure not seen since the global financial crisis.

“It was only at the peak of the global financial crisis that the RRR was cut by 1 per cent in one go for all major banks,” he said.

The aim of the cut is to force China’s banks, awash with liquidity, to lend more to the real economy at lower interest rates, boosting investment growth and the housing market and by association iron-ore and copper prices, ANZ said in a market note.

It will have an effect, “though the impact of a boost when you’re on a slide can be hard to spot,” ANZ added.

Macquarie Bank currency strategist Will Richardson said the Australian dollar might climb further.

“Many weaker short positions have been washed-out of the market,” he said.

Uncertainty surrounding the Reserve Bank of Australia’s path for interest rates will firm up in the next 72 hours with RBA Governor Glenn Stevens set to speak in New York overnight (AEST), and the minutes of the RBA’s April 7 policy meeting due to be published tomorrow.

On Wednesday, the Australia Bureau of Statistics will publish first-quarter inflation data, which is expected to be largely benign, allowing the RBA to cut interest rates further if needed.

Headline inflation is expect to be around 1.2 per cent from a year earlier in the quarter, with falling fuel prices expected to the main force behind the result. Core inflation is expected to be around 2.3 per cent from a year earlier, the lower end of the RBA’s 2-3 per cent inflation target.

Financial markets are pricing a 50 per cent likelihood of a cut in May, taking the RBA’s cash rate target down to a record low 2.0 per cent from 2.25 per cent currently.

The next policy meeting at the RBA will be held on May 5.

Dow Jones