Emerg­ing cur­ren­cies’ pain con­tin­ues as history re­peats it­self

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

For in­for­ma­tion, dis­claimer and risk warn­ing visit: www.ForexTime.com

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