Currency markets saw a turnaround on Tuesday after Monday’s sharp moves. The safe havens like the euro and the yen reversed on broader risk appetite, after the introduction of further monetary stimulus in China. The country’s central bank (PBOC) cut interest rates as well as the reserve requirement ratio (RRR) today in an effort to prop up the exchange rate and to halt the stock-market tumble. Today’s rate cuts come after the PBOC’s liquidity injections into the markets early on Tuesday, the most in six months.
All these stimulus measures undertaken by China helped moderate concerns about the Fed’s policy. Monday’s equity rout raised concerns that the Fed would delay raising rates and this generated considerable volatility across financial markets.
The euro was treated as a safe haven on Monday and topped 1.17 against the dollar but the shift in risk today caused it to reverse back below the key 1.15 level to touch as low as 1.1436 into the US session. The focus is now back on the monetary policy divergence between the Fed and the ECB.
In terms of Eurozone data today, the main feature was the German IFO on business sentiment, which was slightly – better than – expected. The assessment of the overall business climate increased to 108.3 from 108.0. The forecast was for a decline. Current conditions improved to 114.8 from 113.9, but expectations slipped to 102.2 from 102.4.
Sterling peaked at 1.5818 versus the dollar but then turned back down to 1.5726.
The dollar reversed losses against the yen. After a huge tumble yesterday to a seven-month low of 116.19 yen, it rose to 120.38 after the announcement of the PBOC rate cuts. It touched a session low of 119.41 yen.
The main US data that was in focus today was on new home sales which rose a bit less – than – expected in July. Sales climbed 5.4% to a seasonally adjusted annual rate of 507,000 units, compared to a 510,000 unit pace of increase. Meanwhile, June’s sales pace was revised slightly down to 481,000 units from the previously reported 482,000 units. Other data out today was on consumer confidence and services PMI, both coming in above estimates.