FX Macro Musings: Are Central Bankers Spent?
“I would say that Central Bankers have done what they could do. It’s not a universally held view but generally, central banks have done what they are capable of.”
-Reserve Bank of India Governor Raghuram Rajan, in Jackson Hole Interview with Bloomberg
"The crisis has resulted from a confusion about the appropriate roles of the government and the market. We need to find the right balance again, and I am hopeful we will."
-Reserve Bank of India Governor Raghuram Rajan , Fault Lines: How Hidden Fractures Still Threaten the World Economy
Why the volatility and why now? It’s a fair question because over the last few years central banks have stepped in when uncertainty of markets appeared. In no uncertain terms, this is known as the Fed put. The Fed put originally got its name as the Greenspan put referring to the monetary policy approach of Alan Greenspan the Federal Reserve chairman of the board 1987 to 2000, where there is a common market perception of central bank attempt to prop up securities markets by lowering interest rates and helping money flow to the markets. Many market participants continued to believe in the central bank put via market bailouts. However, those that bought in, hook, line, and sinker have begun to lose confidence. And when confidence goes, so does projection of upside in markets.
The quotes above come from reserve Bank of India Gov.Raghuram Rajan. A little back story, he was last invited to Jackson Hole Wyoming in 2005 where Alan Greenspan the namesake of the Greenspan put was celebrating his career. Rajan noted that the easy money policy over Greenspan’s career has led to, in his words ‘Fault Lines’ in the global economy that must be watched for fear of exasperation. Given that he spoiled the mood of the party, he was not invited back for 10 years. Now he is back with other dour views about the global economy and how capital markets are beginning to look like a fraction of what central banks promised market participants it would look like with the help of their monetary policy and markets are worried and rightly so.
On Tuesday, China’s official manufacturing purchasing manager’s index or PMI dropped below the 50 mark to 49.7 in August. The 50 level on the index indicates the difference between expansion and contraction. This begs the question with the recent market selloff, are markets overreacting to China? My view in short is no. In all likelihood, markets may be under-reacting. At least in developed markets.
A Sour Feeling Spreads
You don’t have to look far for confirming evidence of the global economic growth outlook from the International Monetary Fund or IMF on Tuesday. The IMF noted that due to a slower recovery in advanced economies and further slowdown in emerging economies that expected global growth will remain moderate and likely weaker than anticipated a year ago. This came from Christine Lagarde, the IMF managing director in a prepared speech in a visit to Indonesia. She also noted in her speech, that “the transition to a more market based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy.” As far as equity markets go, that somewhat bumpy has meant $5 trillion wiped out from global stocks after the August 11th Chinese Yuan devaluation with potentially more vanishing later if this slide continues.
Emerging Markets: emerging markets are regional economic forces that are divided by Asian, Central & Eastern Europe, Middle East, Africa, and Latin America FX.
Overview: The month of September has started on a discouraging tone for emerging markets. The panic of August 24 took a break towards the end of the week, but the vice chairman of the Federal Reserve, Stanley Fisher’s comments from Jackson hole put Septembers Federal Reserve meeting back in the play for a rate hike which would likely put further pressure on emerging-market assets given the negative global data trends. The recent weakness has caused Emerging Market ETFs to erase 2015 Gains causing many to wonder how much more pain in his left and when will it stop?
Pacific Asian FX:
Even though it’s a new month the data trend is still disappointing for emerging markets. This trend became painfully obvious as global data open the month on a sour note. While many eyes are on China many pros keep their eyes on South Korea which is known as a bellwether for emerging-market strength. Overnight, we saw South Korean exports in August plunge nearly 15% from a year ago versus expectations of a 5.9% decline. To many, Korea’s exports are indicative of the world’s exports because it is the first monthly set of hard economic numbers from a major economy that is a major producer of goods. Additionally, China is Korea’s biggest export recipient such that weakness from Korea’s exports indicate weakness and China’s consumption.
India’s rupee completed its biggest monthly retreat since August 2013 as global funds exited local shares amid an emerging-market rout sparked by China’s yuan devaluation.
Looking Ahead:Singapore reports August PMI Wednesday, and is expected at 49.4 vs. 49.7 in July.
Central Eastern Europe Middle East & Africa:
Commodity price weakness continues to impact the risk tallies of commodity exporters throughout emerging markets but notably in CEEMEA & Latin America FX. South Africa, Colombia, Chile, Nigeria and Saudi Arabiathrough lower exports growth. As fiscal deficits widen due to weakness of local economies, we see a higher risk of nominal currency weakness continuing. Against the US dollar, the South African Rand has dropped 1.5% of the last week in the Polish zloty has dropped nearly 2.75%, however the real pain is seen in the EURZAR, which gained nearly 6% over the last week on continuing emerging-market weakness.
Looking Ahead:Polish central bank meets Wednesday and is expected to keep rates steady at 1.5%.
Latin America FX:
USDBRL has found itself back at all-time highs as China’s weakness is most clearly seen in this region in Brazil. Monday's month-end oil run or ‘OPEC rally’ propped up a few LATAMFX currencies against the US dollar most notably the Colombian peso, which dropped significantly on light liquidity as oil rose nearly 25% and a three day span alongside with USDMXN, that came down to notable support of 16.60 before resuming the larger trend as Oil did on Tuesday. In Brazil, the fiscal situation is getting dreadful, as not only the government proposed a -0.5% of GDP primary deficit in its 2016 budget draft, but the details have many looking for the nation to possibly face a junk rating, which will make needed capital harder and more expensive to obtain. The Brazilian Riau has led declines against the USD vs. major dollar counterparts earning the moniker, ‘the problem child of emerging market currencies.’
Looking Ahead:Colombia central bank releases minutes on Friday.The next policy meeting is September 25.
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