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Chinese reserve data sour outlook for EUR

The market was given another reason to shy away from the EUR on Thursday, as figures revealed Chinese FX reserves dropped last month.

China’s FX stockpiles, the world’s largest, came in at $3.24 trillion at the end of June, lower than the $3.35 trillion expected and down from $3.31 trillion at the end of March. The news is negative for EUR for two reasons.

First, it suggests growth in China is stuttering, and with it demand for eurozone goods.

Second – and more importantly – it suggests the recycling of China’s FX reserves into the EUR is no longer a source of support for the single currency.

The exact make-up of China’s FX reserves are a state secret, but it is believed about 65% is held in USD, 25% in EUR and the rest in other currencies, including GBP, JPY and AUD.

That means, as Beijing’s USD reserves increase, it supports the EUR as China goes out into the market to buy the single currency to rebalance the make-up of its reserves.

That Asian central bank bid has been one of the factors that has supported the EUR, even as the region’s debt crisis has threatened its existence.

Now, however, that bid appears to have disappeared. Slower growth in China threatens to hasten the EURUSD’s demise.