The Chinese stock market has all but collapsed the past several weeks, falling off nearly 25% in a six week span overall capped by a 6.7% drop yesterday. The causes for concern in the Forex world relate specifically to the Dollar.
As you might recall from several weeks ago, I spoke of the Chinese selling off some of their US treasuries and diverting that money to support their commodity purchases.
This tactic is proving to be detrimental to the short term stability of the Chinese economy as with the information on the stock exchange shows that industry is not moving which means the metals and durable goods they are buying are sitting in warehouses instead of feeding the economic machine.
For the Dollar this is a signal that could spell out a difficult Fall/Winter once again, as China commits more money to helping their own corporations and diverts more and more funds away from Treasuries.
Already, the US has held three Bond issue auctions in which the Chinese bought nothing – a fact that is not getting as much attention at this stage than it should. I would bet, since my blogs have been a few weeks ahead of the mainstream news, that this will become a bigger deal in the coming months as more auctions go by and China continues sitting on the sidelines.
Aside from this we have the British Economy which is sputtering along as it seems the politicians are doing nothing. Political sensitivity aside, the Sterling has been suffering because the establishment in Parliament is still trying to get over a spending scandal which dominated the headlines for two months.
They are timid and afraid to do anything significant for fear of more backlash, so they are also sitting and watching. What Forex investors need is a clear sign from government that they are doing something, being proactive and working to turn the economy around instead of hoping that it will all by itself.
This week will be a slow one, many in the US are off for the week and Europeans are spending the last week catching the remnants of the summer sun. The ECB meets this week – don’t look for anything shocking there – they too are catching rays.
JPY. The Japanese Yen rallied on Monday as a 6.7 percent fall in the Shanghai Composite Index in China sent investors to the relative safety of the Yen for safety and was a big factor on the higher-yielding currencies most of the day.
The Yen also rose in part on a post-election rally that saw the opposition party take over for the first time ever. The winning party called the Democratic Party of Japan is widely seen as to favor broader spending in government run social programs and economic stimulus programs.
At 11:15PM GMT, the Yen was up .6% to the US Dollar, up .3% to the Euro to 133.43, up .35% to the British Pound to 151.71, up .43% to the Swiss Franc to 87.95 and up .2% to the Australian Dollar to 78.68.
More Forex trading news. Trading was extremely quiet all around as the British markets were closed for a public holiday and many American’s on vacation in advance of the Labor Day holiday which marks the unofficial end to summer. The primary focus this week will be on the European Central Bank policy meeting on Thursday and the US non-farm payrolls figures which are due to be released on Friday.
The Sterling fell 2.6% in August against the US Dollar, the largest fall of the year for the British currency. The UK outlook is uncertain in traders eyes, despite official efforts to portray the situation as improving. Disappointing data, growing unemployment and rising consumer prices are cited as sources of the uncertainty.
The Chinese Shanghai Composite Index was down nearly 25% in the past 40 days which has raised concerns with American economists about the interest China will hold in future US treasury auctions. Their answer might come sooner than expected as they will have their first opportunity next week to see what, if any affect the drop has had.
