Allan von Mehren, Chief Analyst at Danske Bank, notes that the China stepped up its easing policy further yesterday with a general cut in the reserve requirement ratio of 0.5 percentage points. Key Quotes • “This comes only four weeks after China announcing a reduction in the down payment for first time house buyers, see China eases further – aimed at ailing construction sector, 2 February. • The move is not a total surprise as more monetary easing was anticipated but China likely postponed this while the deprecation pressure was raging during January. However, with some calm restored China saw a window to ease policy. • It is probably not a coincidence that the move comes after the G20 meeting where policymakers discussed the scope for underpinning global growth further. Next in line to ease its policy is set to be the ECB at its meeting on 10 March. • This should help underpin global risk sentiment but since it is not a big surprise it will probably not have a major effect. More important from China will be the PMI data due for release tomorrow. • Keep an eye on the CNY in coming days to see if this ignites another round of downward pressure and capital outflows. The CNY’s immediate response has been to weaken moderately. • The continued need for monetary easing is set to keep the pressure on the CNY but we do not look for a devaluation. China has been very explicit about this and also reiterated it at the G20 meeting. We expect a gradual weakening of the CNY but China will not allow a big disorderly move and we believe PBoC has the tools to counter this. Intervention and draining liquidity in the offshore market have proven efficient weapons to fight depreciation pressure as it makes it more expensive to shorten the CNH. • We expect further policy easing including both rate cuts and fiscal policy. However, the extent to which China will cut rates is set to depend on the pressure on the currency. • We continue to look for a moderate recovery in Chinese construction and industry this year as policy stimulus aimed at the housing market should gradually start to kick in. Home sales were up 15% last year and contributed to a reduction in the inventory-sales ratio and there are tentative signs that the construction sector is close to a bottom.” For more information, read our latest forex news.