Currency Traders Run For The Hills

This morning all markets moved to risk off trading as fears over China’s lackluster PMI data issued on Friday left investors unsure on how to view the Chinese economic situation after the crash of China’s stock markets just a week ago and the change in the fixing of the daily rate for the yuan which send their currency down almost 4% in two days. Asian markets are trading on a negative note as investors shift from riskier assets to risk-free assets like safe-haven government bonds and the yen owing to slowdown in China’s economy that has pulled other global markets in its vicious circle.

The US Dollar weakened by 1.5 percent in the last week owing to the dovish stance by the Federal Reserve in the FOMC Meeting Minutes. It was stated that inflation rate and economic conditions lingered below that expectation set by the Federal Reserve for the rate hike. This dented the expectations of a rate hike in mid-September which resulted in low Treasury yields. The USDJPY tumbled by 1.16 to 120.90.

Moreover, instability in the economy of China kept the US Dollar Index volatile which further supported the reason for Federal Reserve’s delay for interest rate hike. Moreover, weak earnings report from Wal-Mart led to disappointing performance of US stocks on Wall Street which acted as a negative factor for the greenback. US Dollar Index made a weekly low of 94.81. The US dollar fell father on Monday morning to trade at 94.29.

The Aussie and the kiwi tumbled near 100 points each with the AUD trading at 0.7223 and the kiwi reached 0.6591. The AUD is now trading at the lowest level since late April 2009. The Australian dollar fell one percent against the U.S. dollar on Monday as investors shunned risk assets over worries that resource exporters such as Australia will be severely affected by a slowdown in the Chinese economy.

The yen climbed to a six-week peak against the dollar early on Monday and raced to a two-year high on its Australian peer as investors sought the safety of the Japanese currency on heightened risk aversion. Worries about a slowing Chinese economy, and in turn global growth, flared up last Friday after a survey showed a further deterioration in China’s manufacturing activity.

This was compounded by a steep drop in the Chinese share market, triggering a domino effect that saw European stocks and Wall Street suffer their biggest one-day drop in nearly four years. To bolster the Chinese economy, the People’s Bank of China is preparing to flood the banking system with liquidity to boost lending, the Wall Street Journal reported, citing officials and advisers to the central bank it didn’t identify. China is New Zealand’s largest trading partner.

Moves to strengthen the Chinese economy could provide some support to the kiwi currency. However, markets are betting the kiwi will end the week lower as traders gain more confidence about the US outlook.

 

 

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