The Australian Dollar to Pound Sterling (AUD/GBP), Euro (AUD/EUR) and US Dollar (AUD/USD) on Friday after the People’s Bank of China took economist by surprise by cutting its one-year deposit rate by 0.25% to 2.75% and reduced its one-year lending rate by 0.4% to 5.6%.
A string of poor economic data releases was the major catalyst for the rate cuts.
Recent data has shown that factory growth has stalled and that the nation’s property market is weakening; the latter was formerly seen as a major driver of growth in the world’s second largest economy but the slowdown in the sector has dragged on consumer activity and curbed demand on goods such as furniture and building materials.
The move by the Chinese bank now puts it into the same category as the European Central Bank and Bank of Japan in introducing fresh stimulus measures.
The action will put into direct contrast with the USA’s Federal Reserve and UK’s Bank of England as both of those central banks are seeking to end their stimulus measures.
‘Targeted relaxation was not strong enough to boost the real economy so now they realised they have to relax policy overall. The economic reason for the rate cut is very strong,’ said Xu Gao, an economist at Beijing based Everbright Securities Co.
Against the Pound, the Australian Dollar advanced back above the 0.55 level. Against the US Dollar, the ‘Aussie’ moved away from a four-year low and against the Euro, it surged to a one-week high.
Pound Sterling exchange rates softened due to economists’ concerns over the by-election win for UKIP as they fear that the result of next year’s UK general election is likely to be unpredictable.
Other traders claim that the win for the anti-EU party is a negative for the Pound as they deem the UK’s membership of the EU as an integral part of their assessment on the UK economy.
‘We have a bias to play Sterling from a short side against other currencies to look for an opportunity to run an underweight position. We will also be looking at option strategies to buy insurance against a market surprise in May an option to sell sterling in terms of currencies,’ said John Stopford, from Investec Asset Management.
The Euro weakened sharply against the majority of its most traded peers after European Central Bank (ECB) President Mario Draghi said that bank policy makers would broaden asset purchases if the inflation outlook across the Eurozone continued to worsen.
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