As we go to press, traders are bracing themselves for an extremely busy week in the currency market.
In the G10 sphere, traders will be reacting to central bank updates and speeches from the Europe, Australia, Japan, the U.S., Canada, and the UK, as well as a number of top-tier data releases from the countries above. However, traders would do well not to forget some of the major events upcoming in the emerging markets as well. Beyond continued violence and geopolitical risk in the Middle East and Eastern Europe, market-moving events are also on tap out of China, Turkey and South Africa.
China: Quarterly Data Dump
Every year in mid-January, mid-April, mid-July, and mid-October, China releases a raft of economic data on how its economy performed over the last quarter; for economists and traders, it’s similar to celebrating Christmas four times per year. Heading into Wednesday’s reports, data watchers are cautiously optimistic after both widely-watched Manufacturing PMI measures printed above the 50 level for the first time this year.
However, last week’s deterioration in Chinese Inflation and Trade Balance data is keeping a lid on expectations. As a general rule of thumb, the higher-frequency monthly reports are subject to more noise than the quarterly releases, so traders anxiously awaiting this week’s reports to see whether they show consistent improvement in the world’s second-largest economy.
From a trading perspective, the Chinese yuan (CME:QTN14) will obviously be impacted by the release, though we still maintain our generally bullish outlook on the Chinese currency for now. More broadly, these figures will serve as a barometer for economic activity in Emerging Markets as a whole.
Therefore, if we see a solid Chinese GDP report (expectations are centered on a 7.4% annualized growth rate), it could serve as the rising tide that lifts all EM FX ships, especially the commodity-reliant currencies like the Mexican peso and South African rand.
South Africa: To Hike or Not to Hike – That is the Question
At its most recent meeting in May, the South African Reserve Bank (SARB) chose to hold interest rates steady at 5.50%, though two of the bank’s seven members voted for an increase. Heading into Thursday’s meeting, the case for a hike will be even more compelling.
From a fundamental perspective, the rand has pulled back off its Q2 peak over the last few months, effectively serving to stimulate the economy slightly by making exports more affordable for foreigners. Meanwhile, inflation remains above the SARB’s target amidst strong private wage growth, though the domestic economy continues to struggle with labor strikes.
The consensus forecast is for the SARB to leave interest rates at 5.50% for now, but some analysts are calling for a preemptive hike to 6.0% to head off inflationary pressures. Given the mixed opinions, the rand will almost certainly see some volatility in the wake of the announcement. A surprise hike could take the USDZAR back down its 6-week low and 50-day MA near 10.55, whereas the USD/ZAR may spike back to its 4-month high back at 10.84 if the central bank stays on hold for another month.