While recent economic data has been mixed, market participants continue to wait with trepidation for the latest FOMC meeting minutes to be released later today. Against a backdrop of unprecedented policy moves in China and the knock on effects of capital flight from emerging markets, traders will be looking for guidance from the Fed as markets’ begin to doubt the immediacy of the Federal Reserve’s anticipated rate increase.
Emerging Markets continue to be pounded by the double barrelled effects of an eventual Federal Reserve rate tightening and increasing uncertainty around the effects of slower economic growth. As it stands now, over a trillion dollars of capital has flowed out of emerging markets in the last 13 months which is a figure that is significantly higher than the capital flight seen during the height of the financial crisis. This capital flight is contributing to a significant uptick in volatility in both emerging market stock indices and currencies. Symptomatic of this has been today’s performance of the Shanghai exchange which at one point today was down 5% before rallying to close 1.2% higher. Outside of China we have seen what may be the start of an Asian currency war with the Vietnamese dong seeing its third devaluation of the year and the ringgit and rupiah trading at lows not seen since the 1997 Asian financial crisis.
As of yet the prevailing volatility in emerging markets has had a limited impact on developed economies outside of the impact on commodity prices and thus the prices of commodity linked currencies such as loonie, aussie and New Zealand dollars. Oddly, in a break of trend, today all three of these currencies are showing signs of strength against the greenback with the Canadian dollar being the strongest preforming of the bunch ahead of today’s release of CPI and crude oil figures in the United States. Focusing on Europe, European stock indices are down while the euro has rebounded against the greenback after four days of losses while the sterling is trading on the back foot against both the common currency and the greenback. Movement in the euro has likely been propelled by news that the German parliament has approved the latest bailout package for Greece indicating that fears of a re-emergence of the Greek financial crisis are, for now, largely behind us.
Prior to the opening of trading in North America, S&P futures indicate that markets will open lower as the nervousness in stocks is set to persist. With US CPI figures and the FOMC meeting minutes set for release later today, we can certainly anticipate movement in the USD and USDCAD in particular as traders digest any news that may give an indication for the timing of the Fed’s eventual lift off. A datapoint to be mindful of are the CPI figures, with a higher read likely to contribute to strength in the USD as the meeting minutes themselves are from July’s meeting and would not reveal the content of the any policy discussions concerning the yuan’s devaluation as that occurred after the last meeting of the Fed.
Further reading:
US core inflation 1.8% y/y, monthly figures disappoint – USD rises after the initial dip
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