In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. Third, it is probably still the case that manufacturing blue-collar as opposed to service blue-collar workers still have an outsized impact on US politics relative to Europe.
XE Currency Charts
CNY, Japanese and US bond yields in the spotlight We identify a further CNY weakening as one of the more pressing risks for EM currencies, particularly those in Asia as China is the mother planet around which its economic satellites orbit.
As well, the Chinese economic trajectory is a concern as China attempts to do the impossible of deleveraging its economy while claiming it can continue to grow. Recent signs point to a new stimulus effort to ward off the risk of a crunch, but there is a long lag between changes of direction in policy and economic outcomes. On a side note, the most recent Bank of Japan meeting is seeing a stronger JPY, which could add some pressure on EM at the margin if the JPY likewise strengthens on the view that the cautious new policy tweaks represent a move, however ponderous, in the direction of tightening.
Recent and longer-term, carry-adjusted Chart: Colombia has far less exposure to China than its other tradeable peers in South America. Equity rally leaves Apple on the shelf. Crude oil squeezing higher with focus on US-China talks. As we approach recession, bonds are your friend. A technical look at copper. Raised hopes of a US-China trade deal driving stocks higher, a softer dollar and output cuts have supported oil following its December collapse, but worries about the global economy still nag.
With a veritable parade of Fed speakers out today and tomorrow we should have a thorough impression of whether the market remains comfortable that the Fed has its back.
The Canadian dollar rallied late last week, but USDCAD traders are waiting for a look at tomorrow's policy report and press conference from the Bank of Canada before placing yet more air under the loonie's wings. This content is not intended to and does not change or expand on the execution-only service.
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Furthermore, the US is a relatively closed economy and largely energy self-sufficient, thus potentially more insulated from FX-induced shocks. To understand this in more detail, one of the main points to consider is that is that the US unlike the Eurozone is running a persistent current account deficit, which means it has more to gain from a rebalancing of the world economy emanating from relative currency adjustments than does the Eurozone.
The second point to consider is that the US has long had a manufacturing trade deficit, but especially in automobiles, an industry that tends to be vocal about excessive US Dollar strength. For example, exports of automobile vehicles, parts and engines to Japan amounted to 2. Third, it is probably still the case that manufacturing blue-collar as opposed to service blue-collar workers still have an outsized impact on US politics relative to Europe.
Linked to this is perhaps the reality that the broader benefits of a stronger currency for the general population via lower inflation are less visible in the US than in more open economies, for instance, the UK or Germany.
Cheaper imports the most visible impact of a stronger currency on the consumer surplus perhaps features less prominently in the US debate than elsewhere. The fact that the US has a lower currency-cum-inflation pass through has been well documented. As globalisation continues to make consumer markets more integrated and coupled with the rise of technology and price comparison feeds at a global level, it may be the case that the exchange rate—inflation nexus continues to weaken.
This also has significant implications for the potency of monetary policy in the developed world, which may have seen its effectiveness weakened not only by the broken transmission mechanism operating via the bank lending channel post the GFC and Great Recession, but also via this diminished FX-inflation pass through, which continues to be taught and communicated by academic economists and policy makers alike.
In all, it would thus appear that from a US policy perspective a stronger USD may be a lose-lose situation, a view I think the Fed covertly shares. On the weak side, we express China concern via KRW, with the Korean economy so leveraged to exports to China and to the trade war theme. The Chinese yuan deserves more attention than any other currency at present, EM or otherwise, as China has engineered a significant weakening in the yuan over the last couple of months that now sees the currency pushing on major inflection points like 8.
As well, the yuan is within one percent of the low versus the official CFETS basket of currencies that was established back in Any move below that level in particular, or any move above 7. Next Tuesday sees the release of the latest China reserves data, with very different implications if reserves have risen more intentional devaluation and more blatantly 'hostile' from the US trade war perspective versus if they are unchanged or have dropped. In the chart below, the EURCNY rate in black is inverted and the prior highs are outlined with the horizontal line right axis.
The weekly updated RMB basket could match the lows for the cycle this week blue line — last data point being July 27 before additional CNY weakness this week. Disclaimer The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.