FX Market Summary 07-10-2013: China growth fears protect the yen

Wednesday’s Asian session was dominated by the latest Chinese trade data, The actual surplus came in close to expectations, but the export and import figures were much weaker than expected as imports fell 0.7% over the year and exports 3.1% as China looks to crack-down on fake invoicing. The data increased concerns over both the Chinese and global growth prospects. There was renewed demand for the yen on defensive grounds as USD/JPY lost support in the 101 area and it dipped sharply to test support below 100 before finding some support.

Momentum then tended to fade with an important degree of caution ahead of key US events later in the day. There was also little in the way of European events during the session. There was caution following Standard & Poor’s downgrading of the Italian credit rating, especially as it remained on negative watch, and there were some rumours surrounding a Spanish downgrade. Underlying concerns surrounding Italy increased given the very substantial bond holdings held by the banks. There were continuing fears over the implications for the banks if there was a sharp increase in yields as this would trigger heavy losses for the banks.

The latest Federal Reserve minutes were due later on Wednesday with Fed Chairman Bernanke also delivering a speech later in the evening. Following the FOMC meeting, markets have moved to price in a tapering of bond purchases by the Fed within the next few months at the latest. In this context, there were concerns over the risk of a more dovish slant in the minutes as there could be more vocal concerns over the threat of a slowdown in the economy. There was also some speculation that Bernanke would look to take a more balanced approach on forward guidance which would sap US currency support.

In this environment, there was a more cautious tone surrounding the dollar which allowed some recovery for the European currencies hit hard on Tuesday.  EUR/USD found support below the 1.28 level and pushed to a high in the 1.2840 region as ranges narrowed. Euro gains were still relatively slow as any advance quickly attracted fresh selling interest.

Sterling had a quieter day with no fresh economic data. GBP/USD did find support on dips towards the 1.4850 area and pushed back above 1.49, although overall sentiment remained very fragile following sharp losses.

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