EM Continues to Pressure G-10 FX

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Market Drivers for January 30, 2014
EM currencies remain weak taking EUR and GBP down with them
Chinese HSBC Final Manufacturing PMI adds to gloom at 49.5
Nikkei -2.45% Europe 0.40%
Oil $98/bbl
Gold $1255/oz.

Europe and Asia:
CNY China HSBC PMI 49.5 vs. 49.6
GBP Mortgage approvals 72K vs. 73K
EUR GE unemployment -28K vs. -5K

North America:
USD Advance GDP 8:30 PM
USD Unemployment claims 8:30 AM
USD Pending Home Sales 10:00 AM

Its been another risk off session in Asian and early European trade today as the turmoil in EM currencies continued to pressure high beta G10 FX lower with EUR/USD breaking below 1.3600 level while cable slipped to 1.6450. The basket of key emerging market currencies from Turkish lira to South African rand declined further dragging G10 currencies lower as investors remained on edge.

On the economic front the final China HSBC Manufacturing PMI added to the gloomy mood by printing at 49.5 from 49.6 flash reading earlier in the month. This was the first deterioration in operating conditions since July of 2013. Export orders declined for the second consecutive month in a row and employment levels at Chinese manufacturers fell for the third consecutive month with payroll contracting at the fastest pace since March of 2009.

Overall the report showed a clear slowdown in economic activity in China and suggested that demand is likely to remain muted for the foreseeable future. Some analysts have already started to reduce their forecasts for China GDP growth with Credit Suisse projecting that Q1 GDP will expand only at 1.5% rate which equates to annualized rate of 6% versus prior estimates of 7.4% growth.

Such marked reduction in China’s growth forecast will no doubt continue to weigh on risk assets as traders adjust their expectations for global growth. Yesterday the RBNZ held off on raising its benchmark rate precisely because of the turbulence in the emerging markets and the slowdown in growth in Asia Pacific region. Although New Zealand’s economy is far bettered positioned for this change than Australia and although RBNZ officials continue to insist that rate hikes will be coming soon, we remain highly skeptical that monetary authorities in Wellington will pull the trigger if the current situation in the region does not improve.

In other economic news, the German unemployment data showed a further improvement to -28K from -5K eyed as the unemployment rate dropped to 6.8% from 6.9% forecast. The market however ignored the news as risk off sentiment dominated early European trade. Nevertheless the euro remains relatively well bid as German growth continues to support the single currency despite turmoil elsewhere.

In North America today the focus turns to advance reading of US GDP with markets anticipating a reading of 3.3% versus 4.1% the period prior. The report could be market moving if it prints at or below the 3% mark, reviving concerns that US growth is slowing down materially just as the Fed begins its QE taper. Yesterday USD/JPY did not react positively at all to FED ongoing reduction of QE and if today’s US economic news disappoints once again then the pair could probe below 102.00 figure once again.

Boris Schlossberg
Managing Director

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