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PBOC firing on all cylinders | Filter the Fed’s Dudley noise while economic data in focus

Asian markets trading in a strong positive territory as investors are cheering the news from the People Bank of China. The PBOC is combating the uncertainty by turning on all of its cylinders. No matter what others hold their views, you cannot deny that the central is not showing its utmost commitment to prop up the confidence in the market. The question is if they can do more? Yes for sure, they can bend the liquidity easing arm as much as they desire, but yesterday’s announcement of another liquidity injection of 22 billion dollars in the economy along with a cocktail of a rate cut has smooth the qualm in the market. The bank has also cut the reserve ratio requirement by another 50 basis point for its major banks, which itself works out another massive liquidity as the banks could use that cash to lend.

Another imperative piece of information released yesterday on the European front to fight the deflation came from the chief economist of the European Central Bank. He confirmed that the bank will beef up its security against deflation. The ECB is ostensibly wary of the abate economic growth in China and its hard landing. The deflation picture looks even worse if you look through the lens of commodity sell off and the bank just had to assure its investors they are not going through this. Nonetheless, a very prompt response and now the only thing you want to see if the bank matches its actions by its words. Certainly, you cannot ignore china is the second biggest market for Europe and a slowdown in China will massively impact its growth which is already on a very shaky ground. Certainly, the European central banks will not be winding down its quantitative easing program anytime soon- not at least before its planned time frame- if not extending beyond that point.

Back in the US, it was all about the comments by the president of the New York Reserve, William Dudley, who has played his part in calming the nerves of the market participants. From his comments it is clear that September is not the strongest candidate anymore and the Fed has developed a few more mandates which should meet before the federal reserve bank can finally raise the interest rate. Nonetheless, I am still optimistic when it comes to September because if the US non farm payroll data which is due in a few weeks does show a strong reading, this could change the game faster than you think. Given the recent liquidity actions by the PBOC, markets could start sailing smoothly in the coming weeks and then if you combine that with the strong economic data in the US, it will be no brainier that all the noise which we are listening these days will fade at a very rapid rate.

The economic calendar for today will focus very much on the upcoming US unemployment claims data. The forecast is for for 275K and a reading better than the forecast could fit the dollar even further higher- making it more challenging for the emerging markets. At the same time, we could also see a sell off for the precious metal, but as long as we are above the $1100 mark, the resistance of 1170 will still be inplay, however, if we break below the 1100 mark, this opens the floor towards the 1050 support mark once again.

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