From ICAP's Adam Carr:
"China’s decision to lift its 1yr lending and deposit rates by 25bp, saw a sharp pull-back in risk last night. If you’ve been long vol you’ve had merry old time. Equities and commodities were belted, rates rallied and a hard bid was put on greenbacks. The decision to hike, the first in three years, saw the one year lending rate rise to 5.56% from 5.31%, while the deposit rate rose to 2.5% from 2.25%. The aim of the PBoC is to remove some of the stimulus being applied and to mop up excess liquidity, not necessarily to apply the brake to the whole economy. Remember that if the Chinese really want to slow things down, they tend to use more direct methods. So for mine, last night’s moves are a bit of a knee-jerk reaction as the economic impact will probably be negligible.
Nevertheless, moves were huge and at the time of writing, AUD had lost 2 big figures to now sit at 0.9668. That kind of swing highlights just why AUD considerations were “at the margin” of the October RBA meeting. The Bank clearly didn’t put too much emphasis on it, it was a marginal consideration and the fact that it bounces around so much explains why. It’s not irrelevant obviously, but I don’t think a high AUD at any point rules out further hikes per se, it may just soften the magnitude – ie 25bp in Q4 instead of 50bp etc. In any case, the Euro and Sterling are also off around 2 big ones to 1.3721 and 1.5691 respectively, while Yen is little changed at 81.55."
