By Jameel Ahmad, Chief Market Analyst, FXTM
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In line with expectations, markets concluded the week suffering losses with the combination of alarming data from China and resumed selling in commodities weighing heavily on investor sentiment. With economic data from China causing concern and the depressed commodity prices leading to pressures on both global inflation prospects and those economies reliant on commodity-linked exports, it looks like recent history is repeating itself from the beginning of the year where the divergence in economic sentiment between the United States and those suffering from changing market conditions was heavily highlighted.
While the economic momentum in the US might not be as powerful as it was at the start of the year, the data remains robust and job creation is consistently proving itself to be the star performer of the US economy. At the same time, economic data from China continues to threaten further weakness in the economy and the figures from Europe remain largely unconvincing. This basically means that we are looking at the increased prospects of the divergence in economic sentiment between the US and everywhere else returning as a dominant theme in market sentiment once again. When you also take into account that the Federal Reserve should be raising interest rates during the second half of the year, probably in September, this paints an overall positive picture for the USD.
However, the emerging markets’ currencies are taking complete punishment from numerous different directions. A wide collection of them have hit milestone lows in the previous nine months, with this being a global phenomenon not restricted to any specific geographical regions. This has included the currencies of Brazil, Chile, Columbia, Indonesia, Malaysia, Mexico, South Africa, Turkey and Russia with the reason for the damage extending much further than the US interest rate outlook.
It is the combination of the threat of slowing trade from China, the price of commodities having not yet found a floor, and the expectations for the Fed to begin normalising monetary policy, that are behind this suffering and with these threats showing no signs of going away, these currencies are still exposed to further lows. It is important to begin stepping away from looking at the US interest rate outlook because the US economy is performing consistently and it is just a matter of time before the Fed begins raising rates. What does this mean? It is time to begin focusing on China because the correlation between concerns over China data and consequent pressure in commodities is extensive.
What investors and those interested in the emerging markets really need to begin focusing attention on is the economic data from China and resumed selling in commodities. Although the China GDP target of 7% is seen as a crucial benchmark after the government announced this level at its objective for growth, China can actually handle slower than expected growth as it attempts to shift its economy towards being more domestically inspired. However, other economies cannot handle a China that is possibly entering a deeper than previously expected downturn with this weighing on raw material exports and this ultimately means there could be more punishment when it comes to the pressures in the emerging markets.
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