As good as it gets for risk assets

Risk assets and currencies have received a further fillip overnight after the PBOC announced another 50bp reduction in the reserve requirement ratio for their banks. With house prices down in most major cities again last month, and property lending and construction slowing markedly, the only surprise is why it took so long to make this decision, which many commentators had been expecting weeks ago. More reductions in the RRR can be expected over the course of this year, because at 20.5% for the country’s largest banks it is still very high and therefore restrictive. Policy-makers in Beijing are clearly proceeding slowly, cognisant that they still need to keep their collective foot on the brake because inflationary pressures are only easing slowly. Interest rate-cuts are unlikely to result until inflation is below 3%, which may not happen until mid-year. As a result, policy-makers are likely to prefer RRR cuts and looser fiscal policy as they progressively relax financial conditions.

For their part, global risk assets have strengthened still further overnight, with the ASX up 1.4% and the Nikkei 1% higher. It just does not get any better for risk assets at present – China’s latest easing follows Japan’s last week and the BoE’s earlier this month, with the Fed still contemplating more QE and the ECB about to undertake another massive helicopter drop of liquidity next week. Meanwhile, the news coming out of the major economies in recent weeks has surprised on the upside almost with exception. High-beta currencies are surging; for the year-to-date, both the MXN and the BRL are up more than 10% against the dollar, while the NZD is 8% higher.

Right now, risk assets and currencies are partying like it’s 1999!