China Responds

Euro down
For most of yesterday, the market in equities tried to rally following an announcement from the Central Bank of China to cut interest rates for the fifth time in a year, and reduce reserve requirements for the banking system. Whilst the optimism lasted, the dollar rallied and the Euro fell back to a current equilibrium level around 1.15. On the other hand, in early trading at least, the Euro rallied against the pound touching 1.37 at best. 

Pushing on a string
Many years ago, the expression ‘pushing on a string’ was used in economic language to describe the futility of interest rate movements, when the real problem was an underlying economic problem which required major surgery. Unfortunately this is true of the current situation in China. All confidence has dissipated and the short lived rally is wobbling. Unless the market regains some poise, a repeat of Monday’s sharp moves cannot be ruled out. Contagion means that this situation is now a worldwide problem, which requires cooperation from the US and the EU in particular.

EU reacts 
Since the middle of July, the European Central Bank has been oiling the wheels of its QE intervention. By insuring that the money reaches the real economy faster than it did via BOE and the FED’s ponderous routes, the expectation (ceteris paribus – all other things being equal) is of a quicker impact on the Eurozone economy. There are already positive signs that the European QE injection is working, and the European economy could well surprise on the upside in 2016. 

This would render current forecasts of €/$ below par by the spring of next year redundant, and indeed a rally back to 1.20 or above would not be surprising.  All forecasting is fraught with hazard, so for hedging purposes my maxim is ‘if it looks good, do something’. It’s much better to trade into a market in ones favour, than to chase one that is running away! 

Electronic madness
Several stories this week have intimated that flash trading is occurring, especially at the opening and closing of markets. The speed of machine driven trading is at times incomprehensible. The FX market is not so prone to ‘flash’ but will, from time to time, ‘spike’ as we saw on Monday.Spikes work on the upside and the downside, meaning orders placed 2 per cent wither side of the market, will sometimes be filled in the most unlikely circumstances.