The dollar fell to a 14-month low against the euro to 1.5063, after a Chinese Central Bank newspaper published its own point of view that the country should increase its foreign exchange reserves in euro and yen, even though the dollar will maintain its status as the main reserve currency.
The vice-governor of China’s Central Bank Yi Gang said the market was perhaps overreacting to this view: “The diversification of foreign exchange reserves of China in different currencies is our longstanding policy.”
The announcement from Moody that the dollar’s “AAA” rating could be in jeopardy, if the United States does not reduce its budget deficit within three to four years is also one of the reasons that pushed investors to sell the greenback. It is interesting to note that this new thrust of the euro, which is more of a weakening of the dollar, occurred nine years to the day after the historic low of EUR/USD exchange rate, reached on October 26, 2000 at 0.8225 and 15 months after its historic high of 1.6040 reached on July 15, 2009.
The break of the psychological point of 1.5000 in EUR/USD has not been followed by massive selling of the dollar so far, and the positive performance of US companies, most of which have begun to announce better than expected results, is certainly a temporary brake on the fall of the greenback. The euro has just managed to reach a new high, but without conviction. It has not really managed to increase its gains despite strong economic statistics at the end of last week.
This suggests that the upward momentum is now slowing down. Moreover, the European Central Bank estimated on Monday that the need for banks to fulfil their minimum reserve requirements was negative (-€105.5B), which means that the market is saturated with liquidity. Also, the situation continues to be critical in the eurozone, where German consumer confidence fell in September for the first time in a year. The G20 meeting in Scotland next week will be well in focus to see if there is a willingness to support the dollar, with the countries that do not belong to this group fearing that the weak dollar might penalise their exports.
The pound, true to its habit, has been extremely volatile this past week reaching a high at 1.6700 and a low of 1.6250, following the release of GDP, which was down by 0.40 per cent in Q3 2009, while the market expected a rise of 0.20 per cent. The drop in GDP over a year increased to -5.20 per cent. Economic activity in Great Britain fell for the sixth consecutive quarter, never seen in history. These figures show that the British economy is lagging behind other G10 economies. Some analysts expect that the Bank of England will increase its asset purchases by £50 billion by the end of the year, which should weigh heavily on the pound.
Upcoming FX Key events:
There a number of G10 and key EM central banks making their rate announcements this week. Today, the Norges Bank is widely expected to be the second G10 central bank to hike rates. Reserve Bank of New Zealand (today) and the Bank of Japan are expected to keep rates unchanged. US data highlights will be durable goods (today), Q3 GDP (tomorrow) and personal consumption.
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FX Technical Key points:
EUR/USD is bearish, target 1.4300, key reversal point 1.5150. USD/JPY is neutral, watch 90.20 and 92.50. GBP/USD is bearish, target 1.5050, key reversal point 1.6850. USD/CHF is bullish, target 1.0650, key reversal point 1.0000. AUD/USD is neutral, watch 0.8850 and 0.9500. NZDUSD is neutral, watch 0.7300 and 0.7725.
Mr Longchamp is head of trading at RTFX Ltd.
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