Ahead of July’s meeting minutes from the FOMC, due out later today, the United States Dollar has a positive tinge this morning and is up ever so slightly against most G10 currencies.
Overview
Once again, China’s economic woes are driving pricing – news broke overnight that Chinese authorities asked some investment funds to avoid being “net sellers” of equities, a further sign of weakness from the world’s second-largest economy. The People’s Bank of China also chose to surprise markets and cut interest rates on Tuesday, and home prices fell in the nation for the first time this year.
It’s important to note, however, that with any dim economic news from China comes a promise from the Politburo for increased stimulus, and markets have largely come to expect this. While we do see a small amount of USD strength on the news like this, its biggest impact comes to emerging market currencies and the Mexican Peso. Increasing global risk spells bad news for EM currencies and other assets traditionally considered a higher risk in general as traders look for more guaranteed returns and assets with fewer ties directly to China.
US trade policy prohibits a large amount of direct trade with China, which most of this year has been to the benefit of the Mexican Peso and the larger economy from both sides. The last few weeks, however, have seen a reversal of this trend as Chinese economic weakness undoubtedly is bad news for EM currencies. Until there is a tangible effect from the promise stimuli from Politburo, we expect USD to continue to stay strong at the expense of risk assets.
.
What to Watch Today…
- No major economic events are scheduled for today
- Monex USA Online is always open
GBP ⇑
Pound Sterling found some footing against USD today after UK CPI data showed – yet again – recalcitrant core and annual inflation but a negative reading month-over-month. Coming in at -0.4% (still slightly higher than expectations), this number is undoubtedly good news for the UK economy, which is facing an ongoing cost-of-living crisis. British wages are now on track to rise faster than inflation for the first time in a year and a half, and bets for the Bank of England’s September meeting have flipped back toward a 25 basis point hike rather than 50.
JPY ⇓
Japanese Yen continues to slide weaker against USD this morning, inching ever closer to the level that prompted intervention from the Bank of Japan on behalf of the currency last year. Finance Minister Shunichi Suzuki said Tuesday that he’s watching currency trends with a “sense of urgency,” but this verbal cue was not enough to boost the flailing Yen. Traders are watching for any signs of a policy change at the Bank of Japan’s September meeting with trepidation as the weak Yen continues to be cause for concern. Regional concerns in Asia also spell doom for JPY after the People’s Bank of China cut interest rates yesterday.
