MARKETS: Woes for emerging currencies continue

China is in a transitional stage where it is attempting to move away from a boom around mining and construction to develop a stronger reliance on other domestic sectors. I think the economy can handle growth below 7%, but it is the economies which rely on trade with China which would be tested and suffer the most because they would have to handle the decline in China trade. The timing of weaker exports from China could not come at a worse time for emerging markets, bearing in mind that their currencies are already under repeated pressure due to the positive interest rate outlook in the US and dramatic decline in commodity prices.
Speaking of the US, the USD received a boost and traded higher against its trading partners after a Federal Reserve voting member said that it would take a severe deterioration in economic data to delay the central bank from raising interest rates any later than September. As I have repeated in my market reports since autumn 2014, I expect that the Fed to begin raising interest rates this September, probably with a 20 basis point hike. Job creation is by far the star performer of the US economy and bearing in mind that the next NFP report from is released on Friday, another impressive jobs number should raise optimism for an interest rate rise in September. This also means there is the potential for the USD to continue gaining momentum.
Following the unexpectedly hawkish comments from a Fed voting member, the USDCHF climbed to a near four-month high at 0.9789. I had stated a month ago that the close above the 200-day moving average was a strong buying signal for the longer-term trader and the pair has now climbed another 200 pips. I have also stressed the importance around the psychological 1.10 area of the EURUSD and although the pair reached 1.11 on Friday, it never closed above this level and has since fallen to 1.0847. With the USD regaining momentum just before the NFP report and the never-ending Greece risks returning once again, the platform is there for a potential heavy fall in the EURUSD this week.
GBPUSD has continued to find heavy resistance just above the mid 1.56 range and has now fallen below its 50-day moving average towards 1.5525. From a technical perspective, the GBPUSD looks vulnerable to further falls and could even decline as far down as 1.53. There is nothing wrong with the UK economic outlook and although its attractiveness continues to raise investor sentiment to the Pound, it is the acceptance that we are still some time away from the Bank of England raising interest rates that is continually limiting GBPUSD gains. While last week’s robust GDP data raised optimism that the BoE can raise rates soon, the recent gains in wage growth and disposable income would need to be filtered through other aspects of the UK economy for inflation expectations to improve before the BoE becomes more comfortable to begin raising rates.
Two emerging market (EM) currencies in sight are the Malaysian Ringgit and Indonesian Rupiah, both of which been under severe pressure this year and repeatedly hit milestone lows against the USD. Both have been hit by the combination of an improving US interest rate outlook and resumption of selling in the commodity markets, but it is the China economic data that I am keeping a closer eye on moving forward. The correlation between alarm bells ringing over China and resumed selling in commodities is one of the easiest trends to spot in the currency markets, and it furthers the weight to investor sentiment for EM currencies that have already been punished by pressure from a variety of different directions.
The discussions regarding whether EM central banks like the Bank Negara and Bank Indonesia should introduce currency intervention is repeatedly being brought up, but most of the pressures have been external and there is little a central bank can do to mitigate these pressures. This is very much about developing a wait-and-see approach and with most of these pressures being external, it’s possible that the outlook could become worse and the central banks should be holding onto the currency reserves. The best prospects to rebound or at least relieve pressure would be if the commodity markets stabilise, because the US data is sustainable and it is inevitable that the Fed will begin raising rates. Investors are now beginning to move away from US interest rate concerns, and instead begin monitoring how these economies handle the lower commodity prices and the threats over reduced demand for products from China.
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