EUR Splutters, EM Dives While Investors See Red

Tapering is not tightening – this well versed Fed fact seems to have fallen on deaf ears when you mention emerging market currencies. However, if you include some Chinese manufacturing contraction and dour employment numbers from the world’s second largest economy, emerging markets should be worried. The pull-back from EM currencies is showing no signs of a pause after the US Fed confirmed market expectations yesterday that it would pare its monthly bond buying by another $10-billion a month ($65-billion).

During this morning’s European session, it was the Hungarian forint’s (HUF) turn to bear the pressure, following in the footsteps of the Turkish lira (TRY) and South African Rand’s (ZAR) dismal display earlier in the week. EM currencies are finding it difficult to adjust to a new environment of restrictive monetary policy, particularly that of the US’s Fed. Despite the EM uncomfortable ride, analysts note that the impact of the pain from tapering is being expressed mostly through currency value readjustment – a certain positive that eventually makes EM currencies competitive again.

Currently, investor’s appetite for risk remains subdued. Risk-off sentiment following yesterday’s losses on Wall St., coupled with a less hawkish RBNZ statement and mixed with a soft final Chinese PMI (49.5) is weighing on commodity currencies like the AUD and NZD. Asian losses have been limited overnight, in part due to Chinese New Year holidays. However, the various asset classes were still capable of giving up most of the good from the Turkish central banks (CBRT) aggressive hike action from the previous session. The Kiwi in particular has fallen to a new month low of $0.8140, in the aftermath of the RBNZ overnight cash rate decision of standing “pat” at a record low rate of 2.50%. RBNZ did acknowledge “considerable momentum” for their economy and forecasted growth to be in line with 3.5% GDP in Q4. Adding weight to the NZD pressure was the mention from Governor Wheeler that the current high level of FX rate is “unsustainable” in the long run.

Europe and the EUR in particular are not escaping the investor’s wrath. It seems that the “deflation theme,” the ECB’s nemesis, has moved back to the front burner, particularly after the German State CPI’s for this month all registered negative month-over-month readings earlier this morning. The EUR has so far managed to penetrate the psychological €1.36 handle despite another improvement in German monthly Unemployment data (-28k, m/m). Not helping the single currency’s plight is that the regions confidence levels remain “patchy.” The market seems to have caught itself long the single currency, and the longer the EUR technically trades below 1.3665-75 will open up a “bear” channel to test support south of 1.3580 level.

The pound is not immune to its own fallout either. Sterling this morning has been pressured lower by a mixed bag of UK data – despite mortgage approvals being at a six-year high, the M4 money supply growth slowed sharply. Throw into the mix, the BoE’s Carney reiterating that UK’s recovery has a way to go before a rate hike, has also been adding pressure to the pound from the sidelines. Dealers remain comfortably short and expect losses to extend to the 30-day lower Bollinger Band (£1.6303) over the coming sessions. Expect capital markets to remain on edge as the PBoC and the Chinese government continue to struggle with domestic financial risks, and as investors adjust to further EM tightening.

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Central Banks Efforts Fade Fast

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