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    IronFX Daily Commentary | PBoC boosts liquidity to calm the markets | 05/01/2016

    05.01.2016, 10am

    • PBoC boosts liquidity to calm the markets China’s central bank injected 130bln yuan (around USD20bln) into the country’s financial system in an effort to calm investors after Monday’s sell-off. By pumping the funds into the market, the Bank aims to signal that it is still on an easing bias and that it stands ready to intervene to support the markets when needed. The Shanghai Composite Index dropped 7% on Monday, triggering an automatic halt to trading that sent a wave of fear in the global markets. The catalyst of yesterday’s carnage in Shanghai stocks wasn’t just the weak PMI data or the yuan fix but rather the fears of over a wave of unlocked shares hitting the market. China’s 6-month banning of shareholders with stakes more than 5% selling their shares nears expiry and this most likely contributed to some downward pressure on stocks.

    • In early trading Tuesday in Europe, the Shanghai benchmark index gave back its early gains and fell around 2.4% as we write. In this environment, we could see increased demand for funding currencies including the JPY, CHF, EUR and Gold. In addition, escalating geopolitical tensions between Saudi Arabia and Iran offer sufficient reasons to maintain some exposure on the funding currencies. Saudi Arabia's regional allies Bahrain, Sudan and United Arab Emirates (UAE) have stepped up diplomatic pressure on Iran, breaking or downgrading relations with the country. As a result, the turmoil in the Middle East offers no clear reason to hold back from funding currencies.

    • Today’s highlights: During the European day, Eurozone’s preliminary CPI for December is forecast to have accelerated to +0.3% yoy, from +0.2% yoy in November. However, German inflation for the same month unexpectedly slowed, which raised concerns that the Eurozone CPI may slow down as well. Given that at its last meeting, the ECB eased policy further to encourage higher inflation, a negative surprise in Eurozone’s inflation rate could leave the door open for additional stimulus in the foreseeable future. This could add further selling pressure on the common currency, at least temporarily. • From Germany, the unemployment rate for December is expected to have remained unchanged at its record low of 6.3%. Following the above-expectations manufacturing PMI for the same month, which showed a continued growth in new orders and consumers’ demand in goods, we could see the labour market to continue to improve. This could drive the unemployment rate even further down in the coming months.

    • Norway’s December manufacturing PMI is forecast to have decreased from the previous month but more importantly to remain below the crucial 50-line. If the forecast is met, this would be the 10th consecutive month of contraction. Even though this could weaken NOK somewhat, given the recent rise in oil prices following the turmoil in the Middle East any losses could be short-lived as long as oil prices continue moving higher.

    • In the UK, the construction PMI for December is due to be released. The index is forecast to have increased to 56.0 from 55.3 in November. Despite expectations of a rise, the unexpected decline in the manufacturing PMI on Monday increases the possibilities for another weak reading in the construction data. Since the shrink in the manufacturing and construction sectors was the main driver behind the slowdown in the UK GDP for Q3, a possible disappointment in the construction index could add to concerns of a further downturn in growth during Q4. This could put GBP under renewed selling interest.

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