By Ashraf Laidi
China is the last of the BRIC nations to be forced to ease as it cut its lending/deposit rates by 25-bps for the first time since 2008.
1 week after Brazil slashed rates to record lows and 1 month after India cut its repo interest rate for the 1st time in 3 years, China finally caves in.
Chinese 1-yr savings rates are now deeper in the red below inflation as today’s PBOC rate cut in the 1-year deposit rate to 3.25%, places it further below the inflation rate of 3.4% to a real deposit rate of -0.11%, further eroding depositors’ savings. Such could be a step to encourage savers to spend and even to invest in the stock market-as has been known to be among the agenda of policy makers during the 2007-8 crises.
Last week’s chart (upper right) highlighted the BRICs policy interest rates seeking the inevitable downward path of 2008-9.
In another sign confirming that this is not 2011 or 2010 when Eurozone market woes were alleviated by the BRICs, Brazil’s central bank made its 7th rate cut, to take its selic rate to a record low of 8.50% as part of the government’s efforts to call on private lenders to reduce interest rates on various forms of credit/financing for business and individuals. Brazilian rates fallen by 350-bps over the last 10 months in an effort to stimulate the sharp slowdown in growth. GDP q/q hit 0.3% in Q4 2011, from 1.1% in Q4 2011 and 2.8% in Q4 2010.
Last month’s cut in the Reserve Bank of India’s repo interest rate was the first since 2009. The RBI has already cut its cash reserve ratio requirement (CRR) twice this year, which encourages banks to lend and hold fewer funds. The cut in the repo rate (principal interest), is aimed at driving down the cost of funds across the board. The repo rate was raised 13 times from early 2010 to last October, aiming to fight off stubborn inflation.
Bernanke’s relatively guarded testimony towards giving any policy signals reflects the possibility that Fed economists are in the process of determining their latest forecasts post-May NFP and Chicago PMI in the face of stable ISMs and housing figures. Since markets have concluded that any further Fed QE would be principally aimed at containing a Eurozone event risk, the US central bank may be waiting for the final plan of action from ECB/IMF/EU before working out its part of the coordinated action.
The current risk-on environment (courtesy of market expectations of central banks) suggests a EURUSD recovery towards $1.2720s, GBPUSD to as high as $1.5660 and AUDSD towards $1.0130s remains a corrective phase, part of a longer term impulsive down wave.
Gold’s recurring inability to surpass its 55-day moving average since mid March despite falling yields reflects the ongoing fear factor (selling holdings to counter losses) as well as eroding confidence that any new quantitative easing may not be sufficient, hence the notion of diminishing returns voiced by Bernanke last year ahead of Operation Twist.
Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index