Euro hit a twenty week lo dropping through the 1.4200 figure in afternoon Asian trade after concerns about Greece, tightening by China and massive stop running sent the single currency tumbling by more than 100 points in a matter of minutes. The situation in Greece continues to weigh on the unit with ratings agencies warning that the county must get its budget in order or risk further downgrade.
However the euro was also felled by a new round of risk aversion after the Shanghai index dropped nearly -3% on overnight trade. The decline in Chinese equities was triggered by reports that China’s banking regulator told several banks to stop lending for the rest of the month. The reports were denied, but the markets reacted anyway on fears that Chinese monetary authorities are becoming serious about curbing excessive credit creation as inflation pressures begin to build in the economy. The PBOC has made several tightening moves over the past month raising the rate on it weekly funding bills.
Economic news was of no help to the euro as well as German PPI data turned negative in December declining -0.1% versus estimates of 0.2% rise. The latest PPI numbers show that price pressures are nonexistent in the region and suggest that the ECB has no reason to consider tightening its monetary policy for the foreseeable future.
The pair appears to have stabilized at the 1.4200 level for the time being, but sentiment against the euro remains negative and if eco data does not offer a glimmer of hope sometime soon, the markets may want to take a run at the psychologically important 1.4000 level in the near future. As we’ve noted earlier, tomorrow’s EZ PMI data becomes even more important within the context of the current price action. If the PMI report misses expectations it could trigger yet more selling as market comes to the conclusion that the economic recovery in the region has stalled.
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