Despite making decent gains in August, following the Chinese bank’s decision to devalue the Yuan, the Euro slipped back again as European bankers cut growth forecast figures and left interest rates unchanged. The Dollar also improved amid positive employment figures. On a wider scale, the reduction in growth forecasts has raised some serious questions over the validity and effectiveness of the trillion dollar asset acquisition plan, which was meant as a means to stimulate economies and encourage growth in the region.
The bank cited low oil prices and a slowdown in emerging markets as the reasons for the reduction, with China being a primary reason for both of these factors. During a speech given by European Central Bank President Mario Draghi, where the new forecast figures were announced, the euro dropped 1.4%, especially as investors and analysts saw the announcement as an indication that the central bank would have to increase its financial support in asset investment.
Positive figures for the U.S. helped to ensure that the dollar performed well against most major currencies, buoyed by positive employment figures and a reduction in the trade deficit, although there are still some fears that the trade deficit will increase further now that the Yuan has been devalued and buyers are likely to invest in cheap Chinese products once again.
The Chinese economic crisis, which has drawn some comparisons with the early stages of the global economic crisis in 2008, has seen oil prices drop as demand from the world’s largest oil buyer dropped considerably. Chinese businesses have also suffered as the Yuan has been dragged upwards by its loose link to the Dollar over the past year. This increase in the cost of the Yuan means that companies have not been able to benefit from the low prices typically associated with Chinese manufacturers and Chinese services, and in turn this means that those businesses have had less to spend.
The result of the Chinese economic problems has been a huge drop in crude oil prices, as well as a reduction in the money spent by Chinese businesses. According to the European Central Bank, these are the two main reasons that the Eurozone has underperformed when compared to its earlier forecasts. As a result, forecasts for both inflation and economic growth were reduced.
Exchange rates closely follow forecasts, and where an economy fails to meet forecasts or is forced to revise forecasts, the market reacts. In this case, with both reductions being seen as a negative indicator of the region’s economic performance, it meant that the Euro slipped in value, undoing the gains it had made in August.
The Euro had performed well in August, following the breaking of the news of Chinese problems. Investors moved away from the Chinese economy, both in terms of stocks and foreign currency, and they moved towards the low yield Euro. The move represented investors looking for less risk and greater stability, but there had been signs that the market was becoming less risk-averse, and with poor inflationary figures around the corner, the lack of potential reward has put many investors off.
In contrast, the U.S. released positive employment figures, which led to positive sentiment regarding economic growth for the country. An increase in exports also meant that the trade deficit for July fell, and sentiment was firmly behind the USD from that point on.
Sweden’s decision to keep rates unchanged meant that Swedish crown also performed well, although this is not considered one of the major currencies. The crown hit a six week high, proving once again that interest rates really do matter to foreign exchange investors looking to turn a profit.