China Intervenes Verbally On Behalf of the Euro

By IBTimes Staff Reporter | May 27 2010 6:31 PM

Equity markets got a boost on Thursday after China’s State Administration of Foreign Exchange said in a statement on its website that Europe has been and will be a major investment market. The dollar weakened against the euro, pound and Australian dollar on the news as a measure of risk came back into the battered S&P 500, which has lost about 12% this month.

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What has really happened in essence is that China, whose currency is pegged to the dollar, has effectively stopped the yuan from appreciating against the euro (at least for the time being). Europe was China’s largest export market in 2009 and a depreciating euro relative to the dollar meant that Chinese goods were becoming less competitive as they grew more expensive.

Meanwhile, Thursday’s second estimate of Q1 2010 GDP showed smaller gains in consumer and business spending than initially reported last month. Overall, the economy grew at a 3.0% annualized pace in the quarter after reporting a 3.2% growth rate previously.

Consumer spending still looked strong however, growing at a 3.5% annualized pace as compared to the 1.6% seen the prior quarter. Corporate profits were up 31% for the year, the most since 1984.

This Trading Stuff Is Just Plain Hard

We had a long AUD/USD trade in the overnight session that yielded 170 pips after I closed it around 7am ET. The reason I closed was because of the many times that I’ve seen things reverse in NY trading.

We also had long trades on the euro, pound and aussie on Tuesday that gained over 300 pips in total; on that one, we got out before NY reversed the trend, which worked out well.

I actually was thinking about getting back into the long AUD/USD trade this morning but after looking at the GDP report, which wasn’t bad even though it was a bit short on expectations, I figured that with all the recent bad news from Europe, traders would look at the data as another excuse to head for the exits. Wrong.

All told, the aussie gained over 200 pips from where I got out. Still, with nearly a 3 to 1 reward-to-risk ratio on the original trade, I can’t complain.

Barton Biggs of Traxis Capital Partners and Marc Faber of the Gloom, Boom and Doom report are both of the opinion that markets are likely to get a pop back to the April highs over the next month or two. Biggs thinks that the previous high can be surpassed although Faber believes that strong resistance will be found at that level. Either way, the dollar will be the main loser if their predictions do come to pass in terms of cross-currency valuations. Of course, the term “loser” is relative given that in this environment (fragile recovery), what everyone would ideally like to see is currency depreciation.