The US dollar continued to feel the wrath of a slowing China as the currency starts to slide against the euro. It would appear that investors are starting to become wary of the effects of an economic slowdown for the Asian power house, as worries mount that any contagion could spread to the west.
Subsequently, the US dollar has drifted lower against the euro, with the pair reaching an intra-day high of 1.1226. In comparison, the USD depreciated around 0.60% percent against the yen, pushing the pair lower to 119.93.
Traders around the globe continued to be worried about the extent to which China’s lower commodity prices and slowing growth will impact US inflationary prospects. There are also concerns that the flow through of any impact could subsequently affect the US Federal Reserve’s case to hike rates in 2015. The central bank has been closely monitoring US inflation and any further deterioration to the headline rate would be seen as a key factor in holding rates steady for the remainder of the year.
In addition, currency markets have recently been relatively bullish, towards the US dollar, fuelled by continuing expectations of a hike to the benchmark rate. However, as storm clouds gather in Asia, the chance of a rate hike is slipping away and this could subsequently impact the bias towards the USD. This is especially salient given the current uneven economic data emanating from the US, despite the incredibly robust unemployment data. The labour market may be signalling a tightening in progress, but this is yet to flow through to consumer expectations, and ultimately inflation.
US inflationary pressures were again in question given Monday’s personal consumption data showing the key index was relatively flat in August. Prices were reported to rise around 0.1% in the month which is significantly below the Fed’s 2.0% target. Continuing weakness in a range of inflation gauges is a serious concern, especially given the economic results emanating from China.
Given the declining Chinese industrial profits index, as well as the absent US inflation, the markets will be closely watching this week’s US Non-Farm Payroll results for signs of weakness. It is highly likely that we could see a softer than expected result which would put significant pressure upon the USD. So prepare for a week of volatile action as the NFP and CNY Manufacturing PMI data hits the wires.