FX Roundup: China sell-off weighs on dollar, euro gains

US and European equities spiralled downwards on Monday, along with much of the commodities futures market, and weighed heavily on the dollar, after China’s ‘Black Monday’ dominated global trading patterns.

The Shanghai Composite closed down 8.5%, as Beijing’s latest intervention to allow its main state pension fund to invest in the stock market failed to soothe fears about the slowdown in China. Wider turmoil saw traders hedge against the prospect of US interest rate hike, pulling the dollar.

At 1438 BST, the dollar was down 3.88% versus the Japanese yen changing hands at JPY117.30 against the preferred carry trade currency. The greenback was also lower by 1.12% against the Swiss franc changing hands at $0.9360. Meanwhile, €1 was fetching $1.1528 up 1.25%, while the pound sterling also rose 0.43% against the dollar fetching $1.5762.

Kit Juckes, head of forex at Societe Generale, said, “Markets are afraid of further economic weakness in China, further pain in global commodity markets and uncertain about Fed and PBoC policy - what they will do and what the impact will be.”

“The divergence between global commodity prices and equities is not a new theme but the danger now is that they begin to re-correlate - as they did when the dotcom bubble burst in 2000 and what had previously been an emerging market crisis became a US recession.”

Meanwhile, the Australian dollar continued to feel the heat from a wider commodities market downturn, losing further ground against an already declining US dollar, exchanging 2.10% lower at $0.7162.

The New Zealand dollar shed 2.92% against the greenback fetching $0.6491, with the Canadian dollar, Malaysian ringgit and South African Rand also under severe stress. In the face of a wider market turmoil, the euro could be an unlikely, if only temporary, beneficiary according to some commentators.

Jane Foley, senior currency strategist, at Rabobank, said, “EUR/USD has climbed to its highest level in 5½ months as euro shorts continue to be reversed. Between July 2014 and March 2015 speculators increased short euro positions aggressively to fund carry trades in higher risk assets.”

“The trade was encouraged by dovish rhetoric from ECB President Draghi and then by the start of quantitative easing from the governing council. Now that capital is flowing out of emerging markets, these trades are being unwound and the euro is finding very strong support.”