China Surprises, ECB, BOE Not

Neither the BOE nor the ECB surprised.  Both did what the consensus expected.  The BOE will buy GBP50 bln more gilts.  There was, I thought, some risk of GBP75 bln.  Any additional QE now will have to wait until after the next inflation report in early August, which means an actual increase in QE is September at the earliest.  

The ECB cut key rates 25 bp to bring the refi rate to 0.75%.  The deposit rate, which is really the floor, was cut to zero.  The euro has come off hard with the as expected move.  We had identified the $1.25 are as key to the technical outlook and this was convincingly violated.  With today's losses, the EU Summit gains have been unwound in full.

 

The biggest surprise is that China delivered a 25 bp rate cut.  We had noted that the PBOC had flooded the market with liquidity in recent days.  A required reserve cut was seen as more likely than a rate cut.  This is the second rate cut in about a months time and reflects the acceleration of the monetary policy response.  In addition, China will allow banks to offer loans as much as 30% below benchmark rates.  Previously banks could only offer loans 20% below benchmark rates. 

The $1.24 area offers the next support for the euro.  A break wold signal a retest on the June 1 low just below $1.2290.  Sterling is faring better.  Watch a trend line coming in near $1.5525 today.   The Australian dollar and yen are faring best.  The Australian dollar reached new highs since early May.  The dollar briefly poked through JPY80 for the first time since June 25 only to be sold off back to the JPY79.60 area.