Currency Traders Are Skeptical And Remain Worried

Currencies continue to recover but not as significantly as hoped after China injected massive amounts of cash into the system. The Aussie is in the green at 0.7132 bouncing off the 0.70 price level but remains at the very bottom of its trading channel. The kiwi has fared a bit better adding 22 points to 0.6496 after the release of a better than expected trade balance. The kiwi is holding close to the 0.65 price level.  Exports to China, the country’s biggest trading partner, rose 14 percent in July to $695 million, underpinned by sales of frozen beef. Sales to China fell 28 percent on an annual basis as the world’s most populous nation scaled back its purchases of New Zealand dairy products. Imports from China climbed 28 percent to $898 million in July, for a 15 percent annual increase.

Trade with the US increased in July, with exports up 30 percent to $479 million, largely on increased beef sales, and imports rising 8.9 percent to $665 million. On an annual basis, exports to the US climbed 31 percent, and imports gained 20 percent.

In a sign that markets are slowly moving back to risk on mode, the Japanese yen continued to decline after skyrocketing on safe haven demands this week. The USDJPY is trading at 119.25 well below its 3 month trading average, but slowly recovering while against the euro the yen is at 137.39. The yen swung between being the best and worst Group-of-10 currency on Wednesday as Chinese stocks fluctuated, a day after the People’s Bank of China stepped up stimulus.

There was little on the economic calendar as the month is just about over and most of the globe is on holiday. Action is expected to remain fairly subdued over the next day or so as traders just breathe a sigh of relief and go back to the family holidays with UK bank holiday on Monday and the following week the US Labor day closes out the summer vacation season.

The euro and the pound have been the best performing currencies during this time of tribulation. The euro is trading at 1.1521 and the pound at 1.5713. The notion that the euro could be a haven in times of turmoil seemed preposterous just a few weeks ago. Yet that’s exactly what it’s become as the world gets rocked by everything from devaluations to bear markets in stocks.

The euro has surged almost 4% against a basket of developed nation peers in the past month, the biggest gain in the group. It’s up against more of the world’s major currencies than the dollar, yen, Swiss franc or pound. And it’s climbing even as the European Central Bank expands the supply of euros.

While the rally signals confidence in the 19-nation currency union following the Greek crisis, it also complicates the ECB’s efforts to jump-start the economy. That’s because a stronger exchange rate has the potential to curb exports and slow inflation. “Safe-haven flows have been mainly targeted at the euro, which is stunning,” said Thu Len Nguyen, a strategist in Frankfurt at Commerzbank. “The ECB won’t just stand aside and may start to verbally weaken the euro”.

Increasing doubt that the Federal Reserve will raise interest rates in September is also supporting Europe’s single currency. The ECB’s quantitative-easing program is even starting to support the euro by reassuring investors there’s demand for European assets. The purchases started out debasing the currency by putting more money into circulation.  The US dollar is holding at 93.97 well below its 98 price level just a week ago.