Yesterday saw two news items dominating proceeding on the Forex markets. In the case of the Euro – dollar, they had the effect of cancelling each other out initially. The news of the decision by the Chinese government to further weaken the Yuan, when all western governments want the reverse to happen, caused a flight to the safety of the US dollar, which sent the EURUSD pair downwards. This was reversed after the London open when news percolated to the marketplace about the conclusion of an agreement on fiscal measures between the Greek government and its lenders from the EU and the IMF.
Chinese devaluation and Greek agreement
The Chinese have long been intervening in the market in order to keep the value of their currency low against the US dollar. This is source of annoyance to the US, as it artificially benefits Chinese exports to the disadvantage of everyone else. Yesterday China accelerated this process, and caused a further 2% devaluation. Market participants chose to see this as a sign that the Chinese economy was in worse shape even than was feared, causing a flight to safety, or a risk-off situation. Risk-off still means only one thing – buy the US dollar.
By the time of the London open, however, two things had happened. Traders realised that the Chinese move, and its implications for the global economy, could conceivably delay the onset of interest rate rises in the US. This is a weakening force for the dollar. When later in the morning it became known that Greece had concluded an agreement to put the measures its leaders had agreed to last month into place, and after surprisingly trouble-free negotiations to do so, the effect on the Euro was one of relief, sending the EURUSD pair even higher.