The Shanghai composite closed down 8.5%, the largest single-day loss in 8 years. Concerns are building that the global situation mirrors 1994, in which the “currency war” claims its roots. In ’94, currency devaluations sparked the Asian financial crisis, which was so long-lasting in its effects that Japan is still suffering from deflation to this day. Currencies of emerging countries have been pummeled in the last twelve months, notable examples being the Russian ruble, the Brazilian real, and the Mexican peso.
The Chinese panic contagion has spread from their stock market overseas, infecting American markets last week and now European stock exchanges as well. The futures contracts point to the Nasdaq being down almost 5% pre-market, and the DAX (Germany’s biggest stock exchange) is currently down almost 4%.
The euro is gaining today, as traders exit their USD positions. The 19 countries of the Eurozone constitute a sort of “safe haven” if the US dollar goes into freefall as a result of the Greek crisis having been resolved for now. Since the vast majority of trades are EURUSD, a fall in the dollar naturally constitutes a corresponding euro rise, even if other factors are present. The worry for the Eurozone now is that German productivity, which is seemingly unshakable, might suffer a slowdown as a result of China’s fall.
The greenback is down almost 1.6% against the euro, pointing to an obvious fretting over the recent plunge in the US stock markets (which shows no signs of slowing). A pullback in the USD was almost inevitable after the massive gains it has enjoyed in the past 12 months, but this is something more: as long as the stock exchanges remain in sell-off mode, the USD will almost assuredly continue to pare those gains.
The UK, in the face of the global sell-off of everything from commodities to currencies, is injecting confidence with their guess for the GDP results for the rest of 2015. The Bank of England expects interest rates to rise to 0.75% in Q1 2016 on the back of improved wage growth and spending. Sterling is up 0.5% against the USD this morning