The top news this European morning is a package of monetary easing measures delivered by Chinese authorities overnight. These measures can be described as a monetary 'bazooka', but there is much work to be done to get Chinese demand back on its feet, ING’s FX strategist Chris Turner notes.

DXY to trade in a tight 100.50-101.00 range

“These measures have delivered decent 3-4% gains in local equity markets and a similar jump in iron ore, seen as a key benchmark for the Chinese property sector. Whilst in theory monetary easing should be negative for a currency, USD/CNH has in fact broken down to a new low. This reflects both Chinese exporters belatedly hedging dollar receivables and re-rating of the China investment thesis and investors being forced to pare back underweight positions in China.”

“Chinese measures add to the reflationary sentiment we were discussing in yesterday's FX Daily. This environment is characterised by steeper yield curves, higher equities and as we pointed out yesterday normally sees the benchmark reflationary FX pair, EUR/AUD, come lower. Indeed, EUR/AUD has dropped 1.3% over the last 24 hours. For the dollar itself, a reflationary environment is mildly negative as investors rotate into more pro-cyclical and EM currencies.”

“Given more manufacturing malaise expected out of Germany today and the euro's large weight in the DXY, this probably means DXY continues to trade in a tight 100.50-101.00 range. However, if a recovery in Chinese domestic demand is the flavour of the day, expect currencies like the South African rand, the Brazilian real and the Australian dollar to do well.”