That's a huge question if you're trading right now
Here's the scenario:
The PBOC announces an interest rate cut and RRR cut in the next few hours. What do you do?
Most of the time, markets would breathe a sign of relief. If it were the Fed that stepped in and said rates would stay flat for longer, or the ECB hinting at more QE, traders would break fingers smashing the 'buy' button.
China is a different animal
The problem is that China is opaque. No one really has any idea what's going on there. The economic data and growth numbers aren't believable so if it looks like the PBOC is panicking then the market wonders why and can panic too.
That's what happened in August and what was serious round of jitters in China turned into a bloodbath. Chinese stocks fell another 11% after the cut before finding a floor.
In October, the PBOC cut when markets had been stable for a few weeks and the market reaction over the following days and week was minimal.
For more on the PBOC and what might happen.
See:
- Two ways to see the surprise Chinese rate cut
- Here is exactly when to watch for a PBOC move
If the PBOC doesn't announce a rate cut but instead announces a sharp yuan devaluation (that's the rumour), then I'm confident it will be seen as a huge negative event for global markets. The Australian dollar, in particular, will take a further beating.
