Market participants headed into the weekend with mixed news. From the US labor report, NFP data came in slightly weaker than expected consistent with recent slowdown. While China announced for all financial institutions 50bp cut in the RRR (now at the lowest level since 2007) and cut the RRR for selected FIs by 100bps. This move by the PBoC followed a signal by the State Council for extra stimulus to combat the economic slowdown. However, we doubt this move was the start of an aggressive easing cycle. Elsewhere, China exports unexpectedly dropped in August as trade to US slowed sharply as the US-China trade war escalates. USDCNY continued to exhibit unexpected volatility trading between 7.15 and 7.11. Ahead of the 70th anniversary of the People's Republic China we anticipated the currency will find stability.
In Europe, headline non-seasonally adjusted trade surplus in Germany climbed €21.4B in July against €17.4B expected and €16.6B in June. The seasonally adjusted surplus rose to €20.2B from €18.0B driven by 0.7% m/m increase in exports, and a 1.5% m/m fall in imports. However, while the headline number looks solid, trend growth in export remains soft. Give the weakness in the European economic engine; ECB’s Draghi is now under pressure to deliverer a strong policy signal. The question remains the composition of the policy package. We expected the ECB to release a package of measures including deposit rate cuts, leveled rate systems, and more asset purchases. The combination of the major economies in China and ECB now easing will have a positive effect on risk appetite. The global stimulus will out-weight short-term negative news. FX traders should watch damaged currency such as AUD and NZD for further recovery. AUDUSD has formed a bullish base, the break of 55d MA resistance at 0.6874 would trigger extension to 0.7101.
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