Emerging market sell off continues as dollar rallies
02/Σεπ/2013 • Currency Updates•
The key market action this week was again in emerging markets, where currencies were generally sold off sharply against the US dollars on fears that the Federal Reserve «taper» is coming as soon as this month. Brazil and Indonesia both hiked rates to try and stem the outflow, while India approved further capital controls. Equities worldwide were spooked by the sell off and (perhaps) insistent talk of military action in Syria, and the net result was a flight to safety that buoyed the dollar against all major currencies save the yen. We had not seen such «risk on/risk off» correlations among asset classes for quite a while.
Mark Carney’s first speech as Bank of England Governor did not live up to the hype that had built around it. It was a relatively muted affair, in which he referred to the UK recovery as «solid but not stellar». More importantly, he did not comment much on the gap between market rate expectations for a hike in early 2015 and his own expectations that this will not happen until 2016. In the absence of any major macroeconomic data releases, Sterling took the news in stride and reverted to trading as a low-beta version of the euro, something that we had not seen much during the summer season. It rose about 0.5% against the common currency, and fell by a slightly larger amount against the dollar.
Last week saw more slow summer trading in European markets, in the absence of market-moving information and with the main focus of investors firmly placed on emerging markets. A spate of consumer and business confidence numbers confirmed the slowly improving outlook across the eurozone. We are now waiting to see whether hard economic data confirms this improved outlook. In particular, we are focused on next week’s release of Spanish and Italian employment numbers for the month of July. A stabilization of the job markets in these two countries is a sine qua non condition for a structural improvement of the European situation, and we have not yet seen it.
Newsflow out of the United States turned more positive last week. US economic growth for the second quarter was revised upwards to 2.5% from the 1.7% originally reported. Most of the revision came from net exports, which rose a strong 8.6% in the quarter. The increase in US exports, if sustained, could add another leg to the US expansion. This should soften the impact that higher mortgage rates are having on the housing sector. In view of this number, we reaffirm our view that the Federal Reserve will announce a progressive reduction in the pace of its purchases of Treasury bonds, while keeping mortgage bonds unchanged, at its meeting later in September. We further expect the dollar to be well supported against all currencies by the continuing rise in US rates relative to those in most of the developed world.