Quiet day for G10 currencies amid emerging markets turmoil

Tom Tong20/Aug/2013Currency Updates

The Indian rupee fell to a record low yesterday, Thailand is in recession and Indonesia’s widest current-account deficit pushed the rupiah to the lowest level since 2009. Chinese banks’ bad loans are increasing and we forecast Malaysia to post its second straight quarter of sub-5% growth this week. The $3.9 trillion of cash that flowed in to emerging markets over the past four years has started to reverse since Chairman Ben Bernanke talked about tapering QE this year.

GBP

There were no economic data releases from the UK on Monday, with little data out of the UK this week markets will focus on Friday’s GDP and Business Investment reports. Commentators are concerned on the sustainability of the economic recovery in the UK as it gains momentum and confidence rises.

UK gilts declined for a sixth day after the Confederation of British Industry raised its forecasts for the nation’s economic growth, which directly reduced the demand for fixed-income securities. Reports displayed an increase in manufacturing and construction activity in July, thus advancing the pound to its strongest in two months against the USD. The pound has strengthened 5% in the past six months, making it the best performer of 10 developed-nation currencies tracked by Bloomberg. The CBI business lobby group increased its forecast for UK economic growth for 2013 from 1% to 1.2%. Part of the increases are down to the availability of disposable income and in business and housing investment.

The only data release today is the 10-y Bond Auction which prints the average yield on the bonds auctioned by the UK Debt Management Office.

USD

During what was a quiet day in terms of top-tier data, Monday saw the Greenback remain steady versus the majority of its 16 major counterparts as markets anticipate the minutes from Federal Open Market Committee’s July policy meeting due out tomorrow. With near-term focus on the rhetoric of last week’s meeting, emerging market currencies have been put under fresh pressure as investors seek further clues as to whether the Fed will soon begin winding down its bond-purchase programme as expected.

Elsewhere, US Treasury Secretary Jacob J Lew will renew his efforts to persuade Congress to raise the $16.7 trillion debt ceiling in a speech in Mountain View later on this week. During 2011, when the debt limit was last negotiated, the legitimate fear of a double-dip recession contributed to a significant amount of turbulence in the stock markets. However, with recent data reflecting a rallying labour market and with consumer confidence at close to five-year highs, investors are confident that an agreement will be possible without nearly as much disruption.

The only data of relative note being released today is the Chicago Fed National Activity Index, released by the Federal Reserve Bank of Chicago. Again, all eyes will be firmly focused on tomorrow’s FOMC minutes along with the Existing Home Sales figures.

EUR

The Euro remained under pressure as it continued to trade towards weak highs against both the dollar and sterling. However, with services data out early in the morning session today we could see the recent weakness dissipate with a stronger than expected print signalling a recovery from a six quarter contraction. The Eurozone remains in trouble as data from Spain revealed that the banking sector is far from healed. Bad loans at Spanish banks hit a record high in June when compared to the ratio of total credit issued. However, their where silver linings in Germany and Greece. The Bundesbank August monthly report revealed that it fully expects the Germanic nation to return to normal growth by the second half of 2013. Additionally, Greece’s summer tourism revenue has grown by 21% this summer with the extra in flow of cash providing a welcome boost to the coffers.

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Written by Tom Tong

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