• Euro Extends Losses
• Italy On The Brink
• China Growth Goes Slow

Friday the thirteenth certainly dawned with all the portent that such a doom-laden date is imbued. Forex traders, already on edge as their live currency charts registered both sterling and the euro under pressure from yesterday’s session, woke up to the news of China’s stagnant growth and Italy’s credit rating hovering just above junk status. The move by Moody’s in downgrading the Italian government bond rating by two notches to Baa2 from A3, reinforced its negative outlook with warnings of further downgrades to come if there is material deterioration in the country’s economic prospects or it encounters difficulties in implementing reforms. This had the immediate effect of knocking eurodollar down to 1.2185 from above 1.22 at the start of trading.

With relative growth concerns and record Greek unemployment at 22.5 percent also pulling the single currency through 1.22 versus the greenback, the dollar index climbed to its highest in two years as the currency held its safe-haven status. As the euro continues extending it losses, trading lower against the dollar again today, so that the market is now focused on EURUSD falling down to 1.20.

“But where can it go from there and where do we look for clues?”, asks FOREX.com’s head of research, Kathleen Brooks. “To answer this, we need to look at the drivers of the euro in recent months,” says Brooks. “It is worth looking at the drivers of the euro since May when EURUSD broke out to the downside of the 1.35-1.30 range that had persisted since February. The chief drivers since then have been: Spain and Italy’s growing fiscal problems, election risks in Greece and the prospect of more ECB action to stem the crisis. At the same time as the euro started to decline we also saw the yen perform strongly and German short term bond yields fall below zero – suggesting risk aversion had gripped the markets,” Brooks concludes.

So, what does this tell us? For sure, the single currency is losing its yield advantage in the FX world and investors are moving into hard German assets as a hedge against a break-up of the currency bloc. So, as Brooks expects, the euro may not stage a meaningful recovery until 1, the ECB starts to regain its yield advantage versus the US dollar or 2, the threat of a break-up of the Eurozone is irradiated.

“However, these two factors are linked,” says Brooks. “The ECB needs to keep monetary policy extremely lose while politicians try and “save” the currency bloc.”

The China Syndrome

AUD felt some pressure following yesterday’s weak jobs data and nervousness ahead of China’s Q2 GDP. In the event, such nervousness was justified. The Asian week finished with a bang as China’s Q2 GDP numbers came in slightly below expectations, though not enough to cause too much of a stir. Nonetheless, the fact that the planet’s most rapacious importer saw its economy growing a lot less fast than the previous quarter, is getting people jittery. And quite understandably so, perhaps; as we’ve seen in the past, Chinese data is not always the most reliable, with individual regions – in an effort to ‘big themselves up’ with the ruling central government – often massage their figures downwards. 

Earlier, as pointed put by Andrew Robinson (pictured), FX Analyst with Saxo Capital Markets, “Singapore’s release of Q2 GDP painted a more depressing picture. Quarter-on-quarter growth slowed dramatically to -1.1 percent from +9.4 percent while annual growth came in at 1.9 percent y/y, slower than the 2.3 percent forecast but stronger than the downwardly-revised performance of +1.4 percent in the first quarter,” said Robinson, who concludes: “Manufacturing was an underperforming sector as the global economic slowdown takes its toll. The SGD weakened 0.25 percent versus the US dollar following the data.”

Drew Hillier. Editor, ForexSpace.com