There was some wild swings in the FX market on Monday as the market started to come to terms with the overnight move from China. In the early hours of Monday morning, Chinese shares continued their sharp fall as concerns over the country's slowing growth persisted. The sell-off continued despite Beijing's latest attempts to re-assure investors. Beijing's latest intervention was to allow its main state pension fund to invest in the stock market. However, this failed to re-assure the market both in China and abroad. The Shanghai Composite, closed down 8.5% and resulted in global equities continuing their slide.
As a result of the sell-off in equities, we saw the safe havens of the Euro, Yen and Swiss Franc benefit the most. Under normal circumstances these safe haven flows would also flow into the US Dollar, instead the Greenback weakened to the lowest level against the Euro since January. The reasons for the market avoiding the US Dollar is that firstly, we have seen a repricing in the chance of a “lift off” in interest rates due to the financial turmoil in the next few months. Secondly, the uncertainty of when the move in rates will occur from the FOMC, is far greater than that of the ECB and BoJ. It is inevitable that the US will be increasing rates before both Japan and Europe but it is the uncertainty of this move that is keeping the safe haven flows to the Greenback restricted.
The market will remain focused on the global market turmoil and whether this move will continue. Meanwhile, Germany the driver of the Eurozone releases its Ifo Business Climate. The economy is beginning to shift into a higher gear and the solid expansion is tipped to continue as external and domestic demand grows. In the afternoon, we gain an insight into consumer confidence in the US.