Emerging Market Currencies Is Where the Action Lies

April 16, 2014

The unremarkable changes in dollar values against other advanced economy currencies has been a frequent theme lately of the weekly currency market essay.  Regrettably, that stability has continued in April, where month-to-date dollar declines amount so far to 1.2% against the Aussie dollar, 1.0% versus the yen, 0.8% relative to sterling, 0.3% vis-a-vis the loonie and just 0.1% against the euro.  With the holidays of Passover, Good Friday, Patriots Day, and Easter upon us, calm should prevail in these dollar pairs, even if other financial markets continue to bounce around to the beat of sobering geopolitical news. 

The striking observation is the dollar’s soft levels against other advanced currencies, which contrasts with pretty upbeat U.S. economic news.  Here are some highlights.

  • The fourth-quarter U.S. current account deficit of $81.12 billion equaled just 1.9% of nominal GDP, less than a third of the last cyclical peak and the smallest ratio since the third quarter of 1997.
  • Net U.S. long-term capital inflows spiked very sharply in February according to figures reported by the Treasury Department.
  • U.S. jobless insurance claims averaged some 316K over the past four weeks, down from 335K three months earlier and 348K six months before.
  • U.S. industrial production jumped 0.7% in March on top of a 1.2% advance in February, boosting capacity usage to a 3-month high.
  • Retail sales rebounded by 0.7% in February and a further 1.1% in March.
  • House prices according to the Case Shiller index of 20 metropolitan areas were 13.2% higher than a year earlier in January.
  • Non-farm payroll jobs rose more than 190K in both February and March.
  • The manufacturing and non-manufacturing purchasing manager surveys both reflected faster growth in March than February.
  • The leadership of the Federal Reserve continues to attach greater probability to the risk of deflation than to excessive inflation, ensuring that short-term interest rates aren’t going to rise in lock-step with continuing positive growth on a recovery that is almost five years old and counting.

The relative stability of advanced currencies contrasts with substantial depreciations recorded by a number of currencies used in emerging market economies.  Over the past eleven months, the currencies of Indonesia, Ukraine, Russia, Turkey and Argentina has plunged more than 10%, and those of Brazil, India, and South Africa have dropped close to 10%.  After advancing about 37% from 8.277 per dollar to 6.05 per dollar between July 21, 2005 and the start of 2014, the yuan has settled back 2.7% against the U.S. dollar this year.  The drop was promoted by a considerable amount of intervention, which is noted in the U.S. Treasury Department’s semi-annual report to Congress on international economies and foreign exchange.  The Treasury did not label China’s government a currency manipulator, a distinction that would facilitate the ease for the Congress of imposing sanctions against the world’s second largest economy, but U.S. officials complain that Beijing’s behavior is not excusable and inconsistent with the pledge to let the yuan be gradually more market determined.  U.S. officials intend to monitor the yuan even more closely, but it seems unlikely that a currency manipulator tag would ever be invoked.  With Washington and Moscow now embroiled in the most strained relations since their cold war ended over twenty years ago, the U.S. can hardly afford to get into a separate huge tiff with China, too.

The world is too widespread for this site to cover emerging markets in the same depth that it does advanced economies.  The site is geared to currency market participants and watchers.  As an analyst who was occasionally assigned emerging markets (e.g., Brazil in 1982), I can vouch from experience that it actually takes more time to handle them than the G7.  Moreover, trading opportunities for emerging markets tend to be both fragmented and limited in terms of asset availability.  Although it seems likely that the greatest market volatility will continue to be found among emerging market currencies, I will continue to devote most attention to the dollar and other advanced currencies.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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