Spot values at a glance:
Equities declined from Japan to Australia, with the steepest slide in the Philippines and Indonesia. The dollar pared earlier gains on the back of robust US economic data, while US Treasury yields hovered around 2.90%. Emerging-market currencies fluctuated around their lowest levels in more than year. The Australian dollar jumped after second-quarter economic growth beat expectations.
EM Fears Intensify:
Emerging markets sold off anew Tuesday as South Africa entered a recession and Indonesia’s rupiah joined currencies from Turkey to Argentina in tumbling toward record lows. MSCI Inc.’s index of currencies dropped for the fifth time in 6 days, closing at the lowest in more than a year. The South African rand led global declines. Turkey’s lira slid on worries the central bank will disappoint investors at its rate meeting next week, while the Argentine peso slumped to a record low and the rupiah sank to its lowest level in two decades even after the central bank intensified its fight to protect it.
Behind the strains on developing nations has been a strengthening dollar, propelled by the Fed’s withdrawal of liquidity, which has raised funding costs globally. That narrative isn’t likely to change soon, with US tax cuts set to stoke American growth for some time yet; a gauge of American manufacturing jumped to a 14-year high Tuesday. That’s left the greenback hovering near its highest level in over a year.
As US rates rise, investor fears over idiosyncratic risks in emerging markets have climbed, from Argentina’s fiscal woes and Turkey’s twin deficits to Brazil’s contentious elections and a land-reform bill in South Africa. President Donald Trump’s threats to ramp up a trade dispute with China with an announcement of tariffs on as much as $200 billion in additional Chinese products as soon as Thursday also hasn’t helped.
US August ISM Manufacturing Jumps:
Last month’s ISM Manufacturing unexpectedly jumped to the highest since May 2004 as orders, production and employment all picked up, even as companies contend with potential complications from trade tariffs, according to a report Tuesday.
The headline figure climbed to 61.3, beating analysts’ expectations of 57.6, and gaining past its prior reading of 58.1. Gains in measures of new orders, as well as production, were reported as well. However the gauge of export orders fell to a 10-month low of 55.2 from 55.3 while the index of exports declined to 53.9, its lowest in a year.
The report shows factory demand is strengthening in the third quarter and adds to signals that the nearly decade-old expansion will hold up well in the second half of 2018. The rise in the employment gauge also suggests manufacturers may record another month of solid payroll gains in Labor Department figures due Friday.
At the same time, the gauges of exports and imports may indicate that months of intensifying tensions are taking a toll on trade. Negotiations with Canada to modernize the North American Free Trade Agreement ended without a deal by Friday’s deadline, though talks are scheduled to resume Wednesday.
US Lawmakers Want Canada Included in New Nafta Deal:
President Donald Trump’s effort to force Canada into signing on to a new Nafta on his terms is facing new hurdles thanks to growing opposition at home to his threat to proceed without the US’s northern neighbor.
Trump’s frustration spilled into the open over the weekend as he railed against Canada on Twitter, as well as its many supporters in both political parties. The president has threatened to leave Canada out of a new trade deal already negotiated with Mexico, but without congressional support he lacks leverage to force Ottawa to make concessions.
The battle with Canada is building as the White House also prepares to roll out new tariffs on products from China that make up some $200 billion in annual trade in the most significant batch of duties yet aimed at Beijing. A public comment period wraps up Thursday and people familiar with the White House deliberations last week said the US president is eager to move soon after that. China has already said it will retaliate.
Trump’s Tariffs Target China’s Industrial Ambitions:
Conflict over China’s industrial policies is at the center of a trade war that’s set to escalate should US President Donald Trump go ahead with planned tariffs on another $200 billion of Chinese goods as soon as this week. The core of those industrial policies is the Made in China 2025 plan to dominate industries from robotics to new-energy vehicles and aerospace.
A key element of that blueprint is an unofficial document that’s slipped largely under the radar: the Made in China 2025 Major Technical Roadmap, better known as the Green Book, after the color of its original cover. The official Made in China 2025 plan has no specific targets for Chinese companies to seize domestic and global market share, and even says implementation must be dominated by markets. The Green Book’s 296 pages, on the other hand, are full of goals that would virtually lock foreign companies out of many industrial segments in China and threaten market disruption for businesses across the globe.
Australian Economy Expands at Fastest Pace in 6 Years:
Australia’s economy grew faster than expected last quarter as households ran down savings to finance their spending, shrugging off falling house prices and weak wage growth. GDP advanced 0.9% from the first quarter, when it rose an upwardly revised 1.1%, the statistics bureau said in Sydney Wednesday. The economy expanded 3.4% in the 3 months through June from a year earlier, the fastest pace since the third quarter of 2012.
The quarterly growth was supported by a 0.7% increase in household spending, adding 0.4% point to GDP, as the savings ratio dropped to 1% from a downward revised 1.6% in the first 3 months, the report showed.
According to Bloomberg news, traders are pricing in little chance of a rate hike before 2020 as international experience suggests that even as economies reach full employment, a level Australia remains shy of, they still struggle to generate higher pay and faster inflation.
Furthermore, Australia is the developed world’s most China-dependent economy and the prospect of a deepening trade war has the potential to reverberate Down Under. Still, today’s data showed exports rose 1.1% in the second quarter, adding 0.2 point to growth.
USDSGD reached its highest level in 2 weeks last night on concern over prospects of further US tariffs on China this week. The strong bounce off the 1.3600 handle last week reconfirmed the uptrend channel the currency pair has been in since March this year. A revisit of the 1.3819 high reached last month is likely over the near future.
AUDUSD rebounded from a 2-year low yesterday after the economy grew faster than expected in the second quarter this year, cutting some speculative bets that the RBA will lower rates this year. The key support remains at 0.7160. Below that, the psychological 0.700 handle is likely to be a short covering target for Aussie bears.
USDCAD gained to a 1-month high, breaching above 1.3200 briefly in the process, amid continued uncertainty over US-Canada trade negotiations. Following the break of the 1.3100 resistance yesterday, the pair looks poised to the key 1.3386 level.
USDCNH continues to fluctuate around the 6.8500 handle Wednesday, with traders buffeted between conflicting signals from a broadly strong US dollar and the PBOC’s goal of propping up the yuan.
USDJPY approached its 1-month high Wednesday following the greenback’s strong bullish move overnight. The currency pair has been steadily creeping up over the past 2 weeks as the dollar takes back its safe haven role due to ongoing trade disputes between the US and China and slow progress with NAFTA. The ISM data released last night has also served the bulls pips on a silver platter as the curve steepens and projections for Fed rate hikes pick up in 2019. The key resistance level resides at 112.
GBPUSD looks poised to snap a 3-session losing streak, after the pair rebounded off the 1.2800 overnight to gain as much 0.4% after Bank of England Governor Mark Carney said he was ready to stay in his job beyond his planned leaving date, although concerns over Brexit kept a lid on the currency’s gains. Sterling has been hit recently by weak economic data, doubts over Prime Minister Theresa May’s leadership and opposition from the European Union to Britain’s proposals for exiting the bloc. The key support remains at 1.2662, a 13-month low.