Over the weekend, we have a 3rd major central bank deciding to undertake easing measures as People’s Bank of China cut its bank reserve ratio requirement (RRR) by 50 basis points bring the rate down to 20.5%. That follows fresh quantitative easing measure by the Bank of England and Bank of Japan in the last 2 weeks.

The recent macro data from China shows 3 important developments.

Recent Data Points to Poor Trade, But Higher Inflation

One is that trade continues to show signs of struggle in China, with the latest trade balance report showing export growth declining year-over-year. While imports fell by an even bigger amount, creating a better than expected trade surplus for China, the overall takeaway is that exports are likely to continue to slow if global economic conditions continue to falter and if Europe – China’s key trading partner – struggles with austerity measures going forward. Weaker trade should add to concerns that China’s growth is decelerating.

The second development is that inflation was higher than expected in January, stemming a 4-month decline in prices. Still, the increase was talked away due to holiday seasonal factors as a result of the Chinese New Year, and prices are expected to continue their descent in coming months. If not, that may limit the scope for China’s central bank to conduct more easing.

Chinese Housing Prices Continue Their Descent

Third, and perhaps most important to the move over the weekend is that housing continues to suffer, with housing prices falling in most major cities. That has created concern that the housing sector may be seeing a bursting of its bubble. Chinese authorities have done their best to cool rising speculation in housing, but at the same time a large decline in prices, and an increase in dud loans, is not welcome.

From Bloomberg: “China’s January home prices recorded their worst performance in at least a year, with none of the 70 cities monitored by the government posting gains as Premier Wen Jiabao reiterated his determination to maintain property curbs.

Prices in 47 of the cities fell, while home values in the remaining 23 were unchanged from December, the National Statistics Bureau said in a statement on its website today. New home prices in the nation’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou declined for a fourth month.

Today’s figures came after private data also showed signs of cooling. China’s average home prices fell for a fifth month in December, according to SouFun Holdings Ltd., the country’s biggest real estate website.”

Though a little dated (from November) we have a look at the recent trend of falling housing prices:

Cut to RRR Should Herald Gains for AUD and NZD

The cut of the reserve ratio requirement had been expected prior to the Chinese New Year as we had talked about in our preview of Chinese CPI a few weeks ago. By cutting the reserve ration requirement (RRR) by 50 basis points it should inject around 400 billion yuan ($63 billion) of fresh lending into the economy. Bank lending was very weak in January.

Here’s a look at China’s RRR prior to today’s move:

With inflation still a concern, we shouldn’t expect a cut of the central bank’s interest rate anytime soon, and any loosening measures will come with further reduction of the RRR if necessary.

The move should be interpreted as a “risk positive” event and can help boost the Asia-Pacific higher yielding commodity and growth linked currencies - the AUD and NZD – to start Sunday’s trading. The fact that Greece is also closing in on securing a second bailout package to go along with a debt restructuring/swap agreement should also fuel “risk-on” trades (unless some mishap comes along, which should not be discounted).

The AUD/USD has been stuck in a sideways trading pattern over the last week and a half. The action by China’s central bank at first blush can help the AUD/USD make an attempt at 1.0770 and 1.0790, the most recent resistance levels.

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Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.