Difficulties for Emerging Market Currencies Despite Lower Chinese Money Market Rates

February 19, 2014

Bloody street unrest with deaths reported in the Ukraine and Thailand have generated selling pressure on a wide spectrum of emerging market currencies overnight, including the hryvnia, baht, rand, ruble, forint, zloty, and koruna.

Investors await FOMC minutes due at 19:00 GMT today and in the meantime are perusing an unexpected rise in the British unemployment rate to 7.2%, a dip in Japan’s all-industry index, a 61-month low in Chinese business sentiment, higher South African consumer price inflation, and lessening Australian wage inflation.

The dollar fell by 0.4% overnight against the yen on the rise in risk aversion and also shows losses of 0.2% versus the loonie and kiwi and of 0.1% relative to the Australian dollar.  EUR/USD is steady but too pricey the the euro area’s weak and deflation-susceptible economy at 1.375.  The dollar is 0.2% stronger against the yuan.

Investor relief at an unexpected drop in Chinese money market rates lifted that country’s share prices by 1.2%.  In other Pacific Rim bourses, stocks rose 0.8% in Indonesia, 0.6% in Singapore, 0.4% in India and New Zealand, 0.3% in Australia and Hong Kong, and 0.2% in Malaysia.  There have been equity declines of 0.4% in Thailand, 0.5% in Japan, 0.2% in South Korea, and in much of Europe.  So far, stocks are down 0.9% in Spain, 0.6% in Italy, 0.5% in London and Frankfurt, and 0.4% in Paris and Zurich.

The ten-year British gilt yield settled back four basis points after U.K. labor statistics were released.  Ten-year German bunds and Japanese JGBs are unchanged, but futures point to a lower Treasury yield in spite of yesterday’s news of a $47.8 billion run-off of Chinese Treasury holdings in December.

West Texas Intermediate oil advanced another 0.5% to $102.91 per barrel.  Gold is 0.4% softer at $1320 per ounce.

Besides the advent of FOMC minutes from Janet Yellen’s first meeting as chairperson, the central bank watching front showed a 25-basis point cut of Chile’s main policy rate to 4.25% and the release of Bank of England minutes from the MPC meeting of February 5-6.  Such affirmed that interest rates needn’t be raised as soon as the jobless rate dips under 7.0% because the U.K. economy will still need to absorb spare capacity before tightening can begin without putting the economy in jeopardy of undershooting the 2% medium-term CPI target.  Interest rates will go up gradually and peak below 5%.

British labor statistics showed a 7.2% average jobless rate in the fourth quarter of 2013.  While down from 7.6% in 3Q and 7.8% in 2Q, it was higher than the 7.1% sustained over the three months to November.  Wage earnings between 4Q12 and 4Q13 rose by a very subdued 1.1% including bonuses and 1.0% excluding such.  The claimant count of unemployed workers fell in January by a slightly greater-than-forecast 27.6K.  This drop was very similar to that of 27.7K in December and an average decline of 27.3K per month over the past twelve reported months.  The ILO jobless rate in 4Q12 had been 8.4%.

Construction output in the euro area recovered 0.9% in December after three straight month-on-month declines.  Construction fell by 1.0% between the third and fourth quarters and by 2.9% in calendar 2013 versus 2012.

The Conference Board reported that France’s index of leading economic indicators edged up only 0.1% in December, matching November’s result, and that the index of French coincident indicators was unchanged in the final month of last year.

The ZEW investor expectations index for Switzerland unexpectedly weakened to a reading of 28.7 in February from 36.4 in January.  Dutch consumer spending growth accelerated to 0.7% in December from a 0.3% rise in November.  Danish consumer sentiment, which had risen to 6.3 in January from 2.9 in December, settled back to 4.2 in February.  The Greek current account deficit narrowed to EUR 215 million in December from EUR 744 million the month before. Spain posted a EUR 1.83 billion trade deficit in December versus EUR 1.76 billion in November.  Finnish CPI inflation held steady at 1.6% in January.

The Japanese government retained the same assessment this month of economic activity (“recovering moderately”), although the view of exports was switched to flat from weakening.  Government officials said that “prices are rising moderately,” which was an upgrade from “holding firm” and the first such positive designation since October 2008.

Japanese data released Wednesday

  • Documented better on-year growth in department store sales of 2.9% last month versus 1.7% in December.  The upcoming 3 percentage point increase of the national consumption tax is a strong incentive to buy things now rather than wait.
  • Revised the index of leading economic indicators for December downward to 111.7 from 112.1 reported initially.  111.7 is still the highest since April 2007.  Coincident economic indicators were said to be “improving.”
  • Revealed the second month-on-month decline in three months in the all-industry index, a supply side monthly proxy for GDP.  The all-industry index dipped 0.1% in December, trimming the 4Q-over-3Q rise to 0.2% from gains of 1.0% in the second quarter and 0.6% in the third quarter of 2013.  The all-industry index rose 0.7% in 2013 following a drop of 0.5% in 2011 and a 1.2% increase in 2012.

According to the government MNI agency, Chinese business sentiment fell to 50.2 in February, weakest since the start of 2009, from readings of 52.2 in January and 58.4 in December.

Australian labor costs went up 0.7% sequentially last quarter and recorded a gain of 2.6% from the final quarter of 2012, down from on-year increases of 2.7% in 3Q13 and 3.4% in the final quarter of 2012.

The Conference Board index of Australian leading economic indicators jumped 0.8% in December, four times more than in November, but the index of coincident economic indicators for that economy went up just 0.1% in the latest month. 

South African CPI inflation rose to 5.8% in January, most since September, from 5.4% in December.  Rand depreciation has been importing some price pressure.

U.S. mortgage application slumped another 4.1% last week, no doubt hurt by the awfully nasty weather.  The 30-year fixed mortgage rate rose five basis points to 4.50%.  Later today, U.S. housing starts and producer price figures get released.  Three Fed officials — Lockhart, Williams, and Bullard — speak publicly today, but the main event will be the FOMC minutes.

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

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