Decidedly Bleak

The view turned decidedly bleak
For EMG nations this week
Though Turkey was worst
Some others were cursed
As well, since more funding they seek

The Argies are feeling put out
The rand had an actual rout
In LATAM they all
Enjoyed (?) quite a fall
But China, more weakness, did flout!

In truth, this morning things are rather dull in the FX markets, although I’m pretty sure that most traders are relieved. It has been an extremely difficult week for emerging market currencies and volatility remains pretty high. As an example, this week saw the South African rand fall nearly 6%, with 1% coming overnight. In LATAM, while the Argentine peso fell nearly 6% that was not the only casualty. Brazil felt the sting with the real falling 2.75%; Chile saw its peso down 3.5% while the Colombian version fell 2.7%. In fact, the best performing peso was Mexico’s, falling only 1% this week.

Of course, given that the Turkish lira was where all this started; we cannot ignore its movement. If you recall, last week it collapsed, falling nearly 40% at its weakest. Then, in response to several moves by the central bank restricting liquidity and stealthily hiking interest rates, it recouped nearly half that loss. However, this morning, the lira is once again falling, down about 5% as I type. The only thing we know for sure is that this volatility is unlikely to end soon as the market will continue to test the central bank, as well as President Erdogan’s ability to continue his policies of folly.

Finally, a quick look at APAC currencies shows INR as the only one with significant movement, falling 2% and breeching the 70.00 level for the first time ever. But the rest of this space, though it definitely saw volatility, wound up little changed on the week. And despite a great deal of anxiety about the renminbi, it is essentially exactly where it started on Monday.

The message that can be gleaned from this movement is that there are a great many countries which have fiscal imbalances, and whose prospects for future growth are being impacted by a combination of two US policies. First, as the Fed continues to raise rates and withdraw liquidity from markets via shrinking its balance sheet, those nations that relied on cheap dollar funding for their recent growth are finding themselves under pressure. And, of course, the second US policy impacting these nations is the reintroduction of tariffs on trade. Most emerging markets are heavily reliant on exports, with the US as a major destination. Slowing trade growth is also going to negatively impact these economies, and force a re-evaluation of the level of their currencies. As long as these two policies continue, and there is absolutely no sign they are going to change any time soon, every emerging market currency will be living under its own Sword of Damocles.

Meanwhile, in the G10 space, things are decidedly less interesting. While the euro did manage to trade to new lows for the move earlier this week, it has been able to reverse those losses and is now essentially flat since last Friday. The same can be said for most of the space, with the early week panic having dissipated, and very little information to drive currency movement otherwise. The weekly data was very much as expected, showing that the Eurozone and the UK are both rebounding from a very weak Q1, but hardly exploding higher. Rather, both continue to lag US growth numbers, and while the BOE did hike rates two weeks ago, and the ECB continues to slowly wind down QE, neither seems likely to increase the pace of their policy tightening, and so change the near term outlook for their respective currencies. And remember that Brexit continues to hang over the pound (its very own Sword of Damocles), with a distinct lack of movement on that front, other than the calendar which now shows just over seven months to come to a deal.

As to the US, data this week was somewhat mixed with some quite positive results (Retail Sales and Productivity) and some weaker data (Housing Starts and Philly Fed). All told, the weakness was not nearly enough to change the Fed’s trajectory, of that I am certain. And so, in the end, there is no reason to change any views with regard to the dollar; as the Fed continues to tighten policy, the dollar will continue to rise, albeit slowly.

Good luck