FX In ‘Fight Or Flight’ Challenge As EM Stumbles

The summer lull is officially over as global markets and their asset classes begin their “fight or flight” challenge. The theme remains the same; the dollar is becoming “mightier” while Asian currencies and regional markets continue to fall sharply. US, German and UK yields have all pushed higher after yesterday’s July’s FOMC Fed minutes showed broad support for Chairman Bernanke’s plan to start reducing bond buying later this year. The exact timing is still an open question; however, there is nothing in the Fed minutes that require many to change their call of a modest cutback in the pace of monthly asset purchases starting as early as next month.

The timing of US tapering really should not matter. US data is showing that the economy is actually turning. Even Euro data is implying that the developed economies have probably bottomed out. The Fed knows now that current monetary policy is no longer appropriate – this will lead to a gradual shift over time. Precise timing should not be the major issue; it’s convincing everyone that a change is required and it’s approaching.

China tried to come to the rescue in the overnight session, albeit only for G10 currencies. The country produced a strong flash PMI, which helped slow down some of the dollars move against its G10 trading pairs. China’s HSBC/Markit flash manufacturing PMI rose from an 11-month low to 50.1 this month, compared with the median estimates of 48.2. Even the details managed to bring forth some hope; the new-orders index expanded strongly, by 3.9 points to 50.5, the highest level in four-months. Exports order on the other hand, fell -1.2 points to 46.5. Data from China is beginning to paint a picture of stabilization from the world’s second largest economy. Flash PMI follows a string of other reassuring data earlier this month, notably trade and industrial production.

The dollar may be trading mixed against its G10 rivals, however, against developing currencies it is the King! Emerging market currencies continue to extend their losses outright on heighted expectation of an “imminent” unwinding of the Fed’s $85b a-month-bond-buying program. The Indian rupee (INR) has again tested new outright record lows (65.83), personally extending the currency’s losing streak to a fifth trading day, while the Turkish lira (TRY) has dropped to a new fresh record low this morning. The Turkish Central Bank has responded with a larger than usual daily dollar auction of $350m, but that support has yet to wholly filter through. At the present, the currency has stalled just ahead of the psychological 1.99 threshold. It’s only a matter of time before the dollar gets its second wind, presumably from North America.

The 17-member single currency has not been immune to the dollars flight. Already this morning the EUR has endured its own wild ride as investors digested mixed French, German and Euro manufacturing surveys. The EUR happened to test its euro daily low after the slowdown in the French private sector deepened this month and while their manufacturing activity dipped to a two month low. However, Germany the Euro’s backbone, has attempted to come to the EUR’s rescue. Investors have tried to shrug off their French disappointment by focusing on the stronger data readings from both Germany and China. This morning’s Germany composite managers index rose to 53.4 this month, the highest level since January. It was a rebound in export orders that has helped German output growth to accelerate to a two-year high. It was a similar case for the Euro-zone as a whole with Euro activity rising at the fastest pace in two-years (51.7), which would suggest that Q3 is shaping up to be the best in a number of years – Germany cannot falter!

The tech analysts are telling the market that the interim top was seen in the EUR at this week’s high of 1.3453. It’s so much easier after the fact to come up with that! However, confirmation of this scenario requires the EUR to trade through and close below 1.3290. Their short-term target has a 1.28 handle. It is a different feeling to see such ranges now that the summer lull is over. The next six-consecutive weeks is peppered with event risk challenges, from the Aussie to German elections and from the Japanese consumption tax to NFP. The twin towers of volume and volatility should be making a come back. Follow US Yields – that is what’s supporting the dollar, for now at least.

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Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Dean Popplewell