Heavy Risk-Off in Early Asia amid Rumors of China RRR Cut
• Negative sentiment subsided and a higher CNY fix should help to stem the sell-off
• Rumors of China’s required-reserve-ratio (RRR) cut to stabilize market led to a rout during late New York session
Asia market started the day with huge selling of risk assets across the board, in commodity currencies, emerging currencies, and regional stocks. This followed market pessimism late in New York on Friday due to rumors of a cut in China’s required-reserve-ratio. Meanwhile, safe haven assets like JPY, CHF, and even the EUR, posted gains.
After the initial round of selling, volatility seems to subside to some extent and price action retrace levels before the sell-off, though not yet fully. The AUD/USD is still under 0.70 and NZD/USD under 0.6550. The divergence between risk and safe haven assets shows most in crosses like EUR/AUD and AUD/JPY.
While a RRR cut was not seen, State Administration of Foreign Exchange (SAFE) issued a statement to calm the market that China’s financial system is "largely stably and healthy”. Previously used to moderate market liquidity, RRR rate is now a tool to enforce financial stability – according to announcement of a Macro Prudential Assessment on December 29.
All of this could change yet again upon China’s action today. The USD/CNY mid-point was fixed slight lower than prior day, i.e. stronger CNY. This should help to stem the current risk rout. Also watch out for any new financial policy, statements from governmental bodies or top officials.
--- Written by Nathalie Huynh, Currency Strategist for DailyFX.com
Contact and follow Nathalie on Twitter: @nathuynh
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.