The dollar is on the back foot across the board after a change of thought from markets about the situation in China. The world’s No. 2 economy is impacting global markets in various ways. EUR/USD already began an upwards move earlier and now it is tackling higher levels.
But that’s only one of the three reasons pushing EUR/USD to the highest level in just over a month – the round level of 1.12 and beyond. Here’s what’s behind the move:
- Chinese devaluation means Fed will not hike: This is the new logic now capturing the markets. If USD/CNY is weaker, imported Chinese goods cost less in the US and inflation is lower. A stronger US dollar also hurts US exports and serves to tighten the US economy. Basically, China is doing the tightening instead of the Fed. While the Fed never said that directly, it is clear that they are watching the Chinese weakness. FOMC member Bill Dudley said the Chinese story has big implications.
- Weak JOLTS: US JOLTs job openings fell to 5.25 million in June. This was below the previous level and below expectations. While this is a lagging figure, the Fed looks closely at this one to determine the overall health of the labor market.
- Greece: Talks about an agreement for a third bailout got a big bucket of cold water from Germany. We already warned about opening the ouzo bottles after the initial celebration. The euro-z0ne’s dominant power said the agreement was insufficient. Now, you may ask: how does this help the euro? Well, as we’ve seen in July (and with the stronger yen following the 2011 disaster in Japan), the euro’s reaction to news is sometimes different than we thought. The euro has become a funding currency that is repatriated in times of trouble. Yes, even if the trouble originates from the euro-zone.
More: EUR/USD: Relief Rally? – JP Morgan
EUR/USD is currently trading at 1.1195 after hitting a high of 1.1199.
In our latest podcast, we ask: Will they or won’t they? We talk about the Fed and also falling oil and silver.
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