By Dmitry Demidenko, InstaForex

Everybody hoped that economic calendar full of events will be able to reanimate EUR/USD. Unfortunately, we do not have much to do with cold reality. None of the economic reports, whether they are GDP growth, inflation rate, or even FOMC meeting results, forced the pair to take some particular direction. There is still a slender chance that the upcoming employment data might change the situation. Nobody wants to leave their workplaces at all. This week, the International Monetary Fund was the center of attention. The IMF trimmed the 2014 GDP growth outlook of 22 countries of Central, Eastern, and Southern Europe. This is an everyday occurrence, you might say. But let’s look at the real reasons for it.

The projection was downgraded by 1.5 times – to 1.9% from 2.7% – on the grounds of higher volatility on financial markets, geopolitical tensions, and slower economic growth of the euro area. Interestingly, when did the IMF score an increased volatility? For instance, the volatility of the major currency pairs hit the lowest levels since 2007. In the meantime, the world’s largest debt markets are stabilizing, same as the commodity ones. The further shares growth is looking doubtful. The IMF should have got into a panic over the volatility when the Fed started winding down the QE. Now it is a very different situation. What’s more, there is the instable geopolitical situation in the world. The previous IMF forecasts were rather optimistic, despite the fact that the global situation had been the same.

Besides, how strong should be the euro area’s GDP slowdown to have such an impact on the rest of Europe? Moreover, the IMF together with the World Bank made their minds to revise GDP growth bearing in mind the cost of living in each country. They claim that the GDP dollar estimates are no longer appropriate. No doubt, the idea is good, but the theory of purchasing power parity (PPP) has been subjected to criticism for quite a while and for a reason. For example, according to the PPP, the AUD/USD and NZD/USD exchange rates are overvalued by 27% and 20% respectively. That means the pair might theoretically swing around 0.675 and 0.692. Does somebody believe in it? However, let’s return to our muttons.

The results appeared to be extremely interesting. It turned that China’s economic growth will exceed the one of the United States. In 2012, the U.S. GDP was twice bigger than the indicator for China, excluding the purchasing power parity, of course. India is in the top 3 as well. Many emerging countries now feel even better than some developed nations. Do traders need to change the focus from the yen, franc, sterling, and U.S. dollar to the rupee, won, yuan, and peso? Basically, who needs this switch? The International Monetary Fund and World Bank perceive the BRICS countries as a threat now since these nations are set to establish their own bank. Or, maybe somebody wants to set Beijing against Washington as their relationship is uneasy already.

Especially now, when the yuan is devaluating. Or, maybe somebody does not want the currency, the share of which in foreign exchange transactions is little over 2%, which is equal to the one of the Aussie. China knows it. Furthermore, the country has been already introducing the appropriate measures to improve the situation. It is no secret that the People’s Bank of China’s forex reserves are the largest in the world totaling $3.95 trillion. Diversification in favor of the euro and sterling weakens the dollar, which is the main rival of the Yuan. For these purposes, China’s central bank might spend over $1 billion a day. If it is not enough, the Asian country might weight the greenback using the U.S. Treasury bonds. The thing is that the 10-year Treasury bonds have been trading within a range of 2.6-2.8%. In case the yields exceed that range, the People’s Bank of China or another regulator backed by it will return it to normal. Thus, the EUR/USD pair does not want to fall despite the deflationary risks in the euro zone and chances of the ECB’s monetary policy easing. Undoubtedly, we should not blame China only, but it should not be underestimated too.

Source: InstaForex