More woes for emerging markets and the Chinese Yuan
ahead?
This rally in the Greenback is
going to ask a lot of questions over the resilience of its counterparts, but
the largest risk that investors will probably be evaluating is what does this
mean for emerging markets? Dollar strength was one of the key themes behind the
prolonged weakness in emerging markets that took place over the summer, and
this news over the Greenback rallying to new highs is going to bring questions
over whether another round of emerging market weakness should be expected
before we conclude 2018. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
What will be one of the most
interesting themes to monitor is whether this new round of Dollar strength is
enough to push the Chinese Yuan “over the edge” and within touching distance of
the psychological seven level against the USD. Dollar dynamics has been an
ongoing challenge for emerging markets throughout this year, but the resilience
of the Chinese Yuan to not meet 7 against the USD is seen as one of the last
hurdles of defense for emerging markets before another brutal sell-off. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
Basically, if this relentless
drive for the Dollar persists further meaning more highs for the Greenback and
if this is met with the Yuan finally breaching 7 against the Dollar we are
looking at a combination for yet another round of pain for emerging markets
before an already eventful 2018 concludes.
What has encouraged another rally for the Greenback?
Trade tensions or Fed policy?
The other question to ask is what
exactly is behind the push higher in the Greenback? Pointing the finger towards
the Federal Reserve and central bank divergence regarding ambitious interest
rate policy in the United States is the easy answer, but not necessarily the
right one when you consider that the Fed has been consistent with its
communications to raise US interest rates further for a long time. US interest
rate policy in the United States has been priced into the USD a long time ago,
meaning that there is likely a different culprit behind the renewed push for
the USD. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
I would personally attribute the
move to growing skepticism over whether President Trump was sincere with his
narrative that a trade deal with China might be close. While we haven’t seen
any drastic changes to this narrative, we haven’t seen a continuation of this
optimism either, which does suggest that this could have been a strategic ploy
to put the pressure on China before the scheduled meeting at the G-20 summit in
Argentina later this month.
We do overall maintain the view
that a trade deal needs to be announced soon, otherwise it is very difficult to
pinpoint when emerging markets can really bounce back. This means that a trade
agreement is consequently needed for the Yuan, like many other emerging market
assets to recover from a painful 2018. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
Gold decline suggests Dollar drive driven by trade
skepticism
Gold has fallen in line with the
USD drive, meaning that the current rally in the Greenback is not a reflection
of a safe-haven spree from traders. This does weigh in line with the view that
investors are piling up bullish Dollar bets, which makes me more suspicious
that this move has been encouraged by skepticism that a trade agreement with
China can really be agreed in November.
Pound at risk once again to lower 1.20’s
The Pound has been another victim
of a brutal day in the FX markets, but it is also suffering from a return of
investor concerns over the daunting prospect of a hard-Brexit scenario. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
The Pound can still fall further
on hard-Brexit fears, and I would still not rule out the potential of a dive to
the lower 1.20’s in the GBPUSD if the prospects over a deal between the United
Kingdom and European Union being announced before year-end do deteriorate once
again.
Euro could meet 1.10 before end of month
Another currency to keep an eye
on this week is the Euro. The EURUSD has fallen below 1.13 and a sustained
breakdown below these levels represent a risk that the EU currency can drop to
1.11 as soon as this week. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
If concerns over the budget
stand-off with Italy resurface and are met with pessimistic data out of Europe
that an economic slowdown can’t be avoided, concerns that the ECB will not be
able to raise EU interest rates next year will arise and we will be looking at
a risk of the Euro potentially dropping below 1.10 before November concludes.
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