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ECB's Mario Draghi Talk Could Soon Become Irreverent While China Continues Dumping U.S. Treasuries And Foreign-Exchange Assets

|Includes: Invesco CurrencyShares Euro Trust ETF (FXE)

By Ed Wijaranakula, Ph.D., NMS Investment Research

The EUR/USD exchange rate broke down the trendline support after Mario Draghi said at a news conference in Frankfurt on Thursday that quantitative easing is unlikely to come to an "abrupt" end, meaning the ECB €80 billion-a-month bond-purchase program could continue beyond March 2017. One problem is that Mario Draghi could run out of bonds to buy.

EUR/USD

Meanwhile, both the offshore (USD/CNH) and onshore yuan (USD/CNY) dropped to six-year lows against the U.S. dollar on Friday, to 6.7756 and 6.7635, respectively, as traders are betting on a December Fed rate hike. According to Bloomberg, China sold an estimated $570 billion worth of U.S. Treasuries and other foreign-exchange assets from August 2015 to August 2016 in an effort to prop up its currency from plunging.

The Fed may have created its own problem by talking up a December rate hike. A weak yuan will drive down U.S. inflation and send the U.S. manufacturing sector deep into recession, which makes a December rate hike become unrealistic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.