China's Stimulus Policy Dominates the Markets today

The foreign exchange market is dominated by this weekend’s decision by the Peoples Bank of China to lower the reserve requirements of commercial banks by one percentage point, thus signaling a substantial push for monetary expansion. Beijing is clearly concerned that the economy is growing at far too slowly. The stimulus policy the PBoC is pursuing is somewhat counter to its normal actions. But the economy is showing weakness everywhere. Plus, in the property market the first default has occurred. Oddly enough the move caught the markets by surprise and took some of the wind out of the dollar. The fact that US economic numbers continue to be disappointing are not helping. Everything still points to the Fed not raising rates this summer or even this year. Depending on the economic numbers we will probably not see a rate hike until well into 2016. The standoff over Greece’s debt payments is coming to a head. The Germans are not pleased with Athens’ attitude and they could be causing a global financial crisis if the matter is not resolved forthwith. Everyone is angry with the government in Athens, including IMF director Christine Legarde, who is generally seen as a level-headed leader. The ultimate disaster for Greece would be that it gets thrown out of the euro and go back to using the drachma. Athens would then be stuck with a totally worthless, inconvertible currency and would still not be able to pay its bills. The repercussions for the Greek population are incalculable. And they are not all that good for Greece’s creditors. Holding dollars is still the best strategy.