The Big Picture • Yesterday it was the EM currencies that took the spotlight. The Argentinian peso (ARS) and Turkish Lira (TRY) were down sharply during the day. The ARS fell around 12% (it was down 15% at one point) after the central bank stepped back from its efforts to protect the currency. The TRY first fell sharply in the morning, then rallied after the central bank intervened directly in the market to break the momentum, but that didn’t hold the market for long and the currency quickly resumed its decline. This morning it’s trading down around 1.5% from where it was yesterday morning despite the intervention. Many other EM currencies also fell, such as BRL, ZAR, MXN and RUB, although there were some gainers too: the CZK was up more than 1% vs USD and PLN and even THB also rose. The move does not seem to be total EM contagion yet, but rather the markets taking aim at specific currencies that are deemed to be in a difficult position, particularly those with large current account deficits. The trigger was probably yesterday’s unexpected fall in the China manufacturing PMI to below 50, which is worrisome for the EM world in that it bodes ill for the price of commodities. That may explain the decline in KRW, MYR, BRL, ZAR, and RUB, all of which are large exporters to China. It would also explain why AUD was the only G10 currency to open weaker vs USD this morning. The combination of a slowdown in China plus Fed tapering is likely to present a headwind for these currencies for several months at least and so we are probably going to see many more such days again in the future. • Against the G10 currencies however the dollar was relatively weak, gaining as mentioned against only the AUD. The biggest winner was the CHF after the Swiss government raised capital requirements for banks, which now must hold more reserves against mortgages. This is considered to be a tightening of monetary conditions. At the same time the dollar was down by more than 1% against the NOK, EUR and SEK as well. Following the drop in the Chinese PMI, the Markit US PMI fell to 53.7 in January from 54.4, whereas a rise to 55.0 was expected. Although this version of the PMI is usually not as closely watched as the ISM index, the market was apparently nervous and hence more sensitive to surprises than usual following the Chinese slowdown. An unexpected drop in US existing home sales in December didn’t help, either. Apparently many investors are anticipating that if the global economy does start to slow and the US is affected, the Fed won’t end its quantitative easing program. US 10-year Treasury yields were off 10 bps and the implied rates on the 2016 Fed Funds futures lost 11-13 bps, which naturally would remove some of the yield support from USD. • It’s curious that risk aversion in EM countries and fears of a global slowdown sparked an exodus from the dollar. It’s not clear to me why risk aversion should send funds flowing into the Eurozone, a region that still has plenty of its own problems to deal with. A slowdown is likely to hit Europe more than the US as the European economies (read: Germany) are more dependent on external demand than the US is. The move could be reversed if the market thinks the US is in better shape to weather a downturn than Europe is. In this context, the statement after next week’s FOMC meeting becomes even more important than usual. • After a pretty busy Thursday comes a relatively quiet Friday. Italy starts with its retail sales estimated to show no changes in November on a mom basis vs a decline of 0.1% in October. From UK, the BBA mortgage approvals for December are estimated to be up 47300, from 45044 in November, a GBP-supportive number. In Canada, the headline CPI is forecast to accelerate to 1.3% from 0.9%, with core inflation also accelerating to 1.3% from 1.1%. That could induce more profit-taking in USD/CAD as it runs counter to the Bank of Canada’s forecast of lower inflation. • We have two speakers scheduled during the day. ECB President Mario Draghi speaks on “The path from crisis to stability” in Davos and BoE Governor Mark Carney speaks to the Davos CBU British Business Leaders Lunch.
Posted on: Fri, 24 Jan 2014 08:59:22 +0000
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