Major Overnight Headlines
• German GDP confirmed at 0.7% QoQ in Q2; UK GDP revised up to 0.7% QoQ from 0.6%
• UK business investment spending falls 3.5% YoY in Q2 versus a fall of 5.5% previously, pointing to uneven growth
• ABN Amro warns of higher loan impairments to come as profit dips, Thomson Reuters
As we’ve written before, the advent of QE tapering and its corresponding flows have allowed a range of currencies to be re-priced on the basis of fundamentals, and there appear to be two adjustments taking place at present: one in the developing world and another, less distressful one, within the G10 space; even the NZD is starting to underperform on a relative value basis a bit, thanks to Wheeler’s recent “macro-pru” intervention. Within G10, the one common feature of the most popular basket of resource-exporting currencies (NZD, AUD, CAD, NOK) is that their non-resource trade balances are all in the red (or more in the red than their total trade balances). By and large, this is good for FX market players, as FX’s role in “rebalancing” is currently well aligned with the reason those players are here in the first place: to make money. So FX markets are in a unique position given the role that exchange rates play in external adjustment.
We foresee more distress in the developing market FX space in the run-up to and during QE tapering, but we’re currently disposed to view recent weakness here as part of the adjustment, and the concurrent buying of the domestic currencies by their respective central banks as more of a “smoothing” exercise rather than a “preventative” one. Turkey, Brazil, India, South Africa, and Indonesia, all run sizeable current account deficits, so although policy makers are in for difficult battles ahead, these adjustments triggered by a forthcoming, gradual halt to Fed balance sheet expansion should largely be viewed as a relief over the medium-term, at the risk of sounding a bit masochistic. This may in part explain why recent USD sales on the part of central banks for the purpose of intervention have been sizeable on a cumulative basis, although not overly so. Indeed, as we demonstrate in Chart 2 below, relative to the size of USD purchases during weak USD periods, recent intervention clips have been at most very modest. Still, a highly important trend has been set in motion here, and it’s not going to break any time soon. The YoY growth rate in Fed custody holdings has only just fallen below the YoY growth rate in total FX reserves, indicating a rising trend of USD sales. The battles ex-China have only just begun.
Read the full report: FX Daily
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