The Australian and New Zealand Dollars are trading higher on Monday, continuing last week’s strong performance. While last week’s move was primarily fueled by dovish comments from Federal Reserve Chairman Jerome Powell, today’s rally is being fueled by strong appetite for risk in Asia. The catalyst behind the strength is China’s aggressive monetary easing. Additionally, investors are also optimistic about a US-China trade deal with high-level negotiators meeting in Beijing today and tomorrow.
According to Michael McCarthy, chief markets strategist at CMC Markets in Sydney, China’s cuts in bank reserve requirements “are very important and have lifted commodities… this should be supportive for the Australian Dollar.”
China Cuts Reserve Requirement
After a series of weaker-than-expected manufacturing reports, which signaled an economy being damaged by the trade dispute, the People’s Bank of China on Friday cut reserve requirements for all banks by 100 basis points. This makes available about $116 billion in funds for new lending. The plan is to provide stimulus for the economy and slow down the impact of U.S. tariffs.
Analysts also said the size of the cut was at the upper end of market expectations, and the net funds released would be the largest amount in the five reserve requirement reductions since January 2018. Analysts are also looking for further stimulus from the PBOC in 2019. One analysts thinks it’s reasonable to expect as many as four 100 bps cuts this year.
High-Level Trade Talks Begin
Some of the strength in the AUD/USD and NZD/USD is being provided by the first face-to-face meeting between the US and China since President Trump and President Xi Jinping declared a 90-day truce on the implementation of new tariffs.
Momentum is on the side of the AUD/USD and NZD/USD on Monday so continue to look for both Forex pairs to strengthen throughout the session. The rally in the Aussie could slow down later in the session on position-squaring ahead of Tuesday’s Trade Balance report.
Earlier today, the AIG Manufacturing Index came in lower than expected at 49.5, down from 51.3.
In the U.S., investors will get the opportunity to react to the latest ISM Non-Manufacturing PMI. It is expected to come in at 59.6. This is slightly below the previous month’s 60.7 reading. This report could cause a volatile reaction in the market especially if there is a large miss to the downside.
This article was originally posted on FX Empire
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