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IronFX Daily Commentary | 26/08/15

26.08.2015, 9am

China’s new rate cut fail to calm the markets US stocks were initially encouraged by the new moves from the PBoC to free up liquidity into the markets, but then sharply reversed the early gains to end lower on Tuesday. The focus then shifted to Asia and how Chinese stock markets would react on the fresh stimulus. China’s main equity indices appeared to recover and after several attempts to move higher, the Shanghai Composite index was up around 2.5% in late Asian session. Even though it’s a small move compared to the tumble of the last few days, at least the stock market seems to have halted a bit. Nevertheless, we remain unconvinced that China’s broadly-anticipated move to cut interest rates and the reserve requirement ratio (RRR) would be enough to stabilize the tumble in its stock markets. Much more support will be needed from the Chinese government and the PBoC to stabilize the slowdown, in our view. The government will probably need to announce fiscal stimulus on top of the monetary policy easing to fuel again its economy.

Today’s highlights: During the European day, from Sweden, we get the economic tendency survey for August. The forecast is for the indicator to increase a bit, which could strengthen SEK somewhat.

• From Norway, we get the AKU unemployment rate for July. The official unemployment rate for the same month rose to 3.1% from 2.8%. This increases the possibilities for the AKU rate to rise as well. NOK could weaken a bit at these release.

The highlight of the day will be the US durable goods orders for July. The headline figure is expected to fall, a turnaround from the month before, while durable goods excluding transportation equipment are estimated to decelerate somewhat. The focus is usually on the core figure where a positive surprise could suggest the possible start of a turnaround in business investment and could be bullish for the dollar. On the other hand, another dissapointment is likely to keep USD under pressure, as this will push even lower September rate hike expectations.

We have two important speakers on Wednesday’s agenda. ECB Executive Board member Peter Praet and New York Fed President William Dudley speak. Investors are likely to pay more attention than usual on Bank officials for hints if the Fed is still on track to raise rates, following the developments in China, and if the ECB may extend its QE program. ECB Vice President Vitor Constancio said on Tuesday that the ECB will take further measures if it sees a significant risk to the inflation outlook. He also said that it’s too early to understand the effect of what is happening in China, and that the renewed fall in oil price is more relevant for the course of the headline inflation, but there is nothing monetary policy can do about that. The ECB may have to revise down its CPI forecasts at its monetary policy meeting next week.



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