Global investors are nervous this morning, as a litany of idiosyncratic events through the developing world heightened already-bubbling concerns about emerging market economies.
Unlike predictable reactions in equities and bonds, major currencies are generally stronger against the USD, including the risk-sensitive NZD, despite positive US data outturns overnight.
Another drop in the Shanghai Composite index set the tone for the session, with a 3.4% fall taking the index back down to its 200-day moving average.
Late in our session, Kazakhstan abandoned its fixed exchange rate regime, prompting a near-25% depreciation against the USD.
Pressure is mounting on other fixed exchange rate regimes, with particular attention on Saudi Arabia.
In Turkey, a deteriorating security situation ahead a general election later this year (the second for 2015) has seen the lira weaken to its worst ever level against the USD.
North and South Korea exchanged artillery fire across the DMZ, in what is being called the most serious exchange since 2010.
As a result, global investors have taken an understandably risk-averse stance. The S&P 500 is 1.5% lower for the day, and bonds are bid.
However, the reaction in currency markets has been a little peculiar, in that the USD has not benefitted from any safe haven bid nor from the positive economic news delivered overnight (existing home sales and the Philly Fed Index both beat expectations).
A quick note on Greece’s snap election: this is actually likely to produce a stronger ruling coalition than currently exists.
Many of Tspiras’ party rebelled after the recent Greek deal was struck, and he was forced to rely on opposition support. EUR/USD did not suffer at all on the news.
We’d suggest that the reaction in currencies should be framed in the context of a market that is strategically long USD on a Fed rates views, but where conviction is weakening.
From a global growth perspective, the current emerging market jitters are probably not enough to give the Fed reason to pause.
But the more sensitive (and immediate) channel is through commodity prices, where even the perception of reduced emerging market demand will weigh on prices.
As was made clear in yesterday’s FOMC minutes, the disinflationary impact of falling commodity prices (not to mention a higher USD against devalued emerging market currencies) seems the most likely reason for the Fed to delay lift-off beyond Sept.
For NZD/USD, the upshot has been a relatively constructive gain, as opposed to the usual risk-related sell-off. We think the current rally should be capped initially at 0.6650 and then more robustly at 0.6690.
Today, there will be keener-than-usual attention on Caixin’s China PMI, given concerns about that country in particular and emerging markets more broadly.
The usual slew of preliminary PMIs from Japan, Europe, and the US are also due.
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Raiko Shareef is on the BNZ Research team. All its research is available here.