Emerging market positions unwind further as dollar pressure continues

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Idea of the Day

We’ve seen a continual and gradual weakening of the US dollar throughout the past few years whilst the US Federal Reserve has been undertaking its quantitative easing program and now traders look to be readying themselves for the possibility that next month might mark the start of an equally as gradual withdrawal of stimulus.

Already markets have been trying to anticipate such a move with many emerging market currencies counting the cost, as the reverse of what happened during the height of the Fed’s easing looks to be underway.  The decline of the Indian Rupee is a case in point although the weakness of that currency is as much about the slowing economy as it is about tapering talk.  But as yet there’s no distinct clarity on when tapering with actually commence.  So far this week has been building up to tonight’s FOMC minutes for signs that September will mark the end of the Fed’s QE as we know it.  All eyes will therefore be on the dollar today and especially later when the minutes are released.

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Data/Event Risks

GBP: The UK releases Public Sector Net Borrowing data this morning where a surplus is expected, the first since February.  With signs that the UK economy is improving, expectations are for a reduction in government debt which could help support GBP.

USD: The major risk event of the day comes in the form of the FOMC minutes later today which will provide a detailed record of the meeting held two weeks ago.  Many traders are hoping that this is going to answer the “will they, won’t they” taper in September question that’s been dominating the markets in recent weeks.

Latest FX News

EUR: The selloff in emerging market currencies has led to strength in the single currency as well as the Swiss Franc.  EURUSD hit its highest level since February forming a six month high by breaking through 1.3435.

USD: Doubt about whether today’s FOMC minutes will give more of a clue about tapering next months from the Fed led to a bout of dollar weakness yesterday and so traders will be looking to see if there’s a degree of “sell the rumour, buy the fact” leading to a dollar bounce later today.

Further reading: Pessimistic investor sentiment before minutes of Fed meeting released

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