Euro Could be Hit by Chinese Devaluation

The euro could be facing increased downward pressure after the decision from China to benchmark the Yuan to a five year low yesterday.

China has become a significant export trading partner for the euro area, and the European Union (EU) as a whole, and the reduced spending power that a devaluation results in, may create a situation where the euro could tumble.

China is now the second largest export trading partner with the EU, with 9.7% of the export market, second only to the United States, according to the European Commission.

Figures for the EU complied by Eurostat, revealed that from January to October last year, the export market to China grew by a relatively modest 4%, reflecting the suspicions that the Chinese economy was not as strong last year.

The Chinese government has decided to target a lower valued currency in order to boost their own exports, which could nullify the advantages of a lower euro in that trade market.

The euro has suffered falls throughout last year against major trading partner currencies, such as the US dollar and the UK pound, which is expected to boost exports.

After the European Central Bank (ECB)decided to extend the EUR 60 billion per month  Quantitative Easing programme to March 2017, following the Governing Council’s meeting last month, the aim of a low euro valuation was prolonged.

Industrial Producer Prices Down by 0.2% in Euro Area

According to Eurostat industrial producer prices fell by 0.2% month on month from October to November last year in the euro area.

There was a slightly higher fall for prices in the EU, as they fell by 0.3% for the same period.

In October last year, both the euro area and the EU suffered matching industrial price falls of 0.3%.

For November this year, in comparison to the same month in 2014, the reduction in prices was a more severe 3.2% in the euro area, and 3.5% in the European Union.

In the euro area, falls of 0.3% in intermediate goods and energy prices, were the main drivers of the overall industrial prices decreasing.

There was also a drop of 0.2% in the price of non durable consumer goods, while prices remained stable for both capital goods and durable consumer goods.

Across the EU, energy prices was mainly responsible for the 0.3% fall in sector costs, as they were reduced by 0.6%, the highest price decrease recorded in the figures.

Further falls were found of 0.3% for intermediate goods, and 0.1% for non durable consumer goods, capital good prices remained stable, although durable consumer goods increased by 0.1%.

The largest decreases in industrial producer prices were observed in Cyprus -1.6%, Estonia -1.1%, and Denmark -0.9%, and the highest increases in Malta +0.3%, Ireland, France, Latvia and Slovakia all on +0.2%.

The figures will not be received well by the ECB in their fight against low inflation, the estimate of 0.2% inflation for the euro area for December last year released earlier in the week, is widely thought to be a disappointing figure.

Euro Gains Ground on Major Currencies

The euro has reversed some of the recent losses it has made against the US dollar, leaping from buying $1.072 yesterday morning GMT, to £1.086.

Against then UK pound, the euro is currently buying £0.74, from £0.732 before noon yesterday GMT.