Emerging Markets rundown: China sets the tone

As we roll into the first full week of August, it feels as if traders are trying to soak up as much summer sun as possible by stretching their weekend into Monday’s trade.

Currency markets are generally flat, with maybe a slight tinge of USD weakness after last week’s surge. The trading week will begin in earnest in Tuesday’s Asian session, when the Reserve Bank of Australia announces its monetary policy decision. The RBA is just the first of four major G10 central banks that will make a monetary policy decision in the coming days, with the Bank of England, European Central Bank, and Bank of Japan all clustered near the end of this week’s trade.

With central bank meetings and high-impact economic data galore out of the world’s major economies, emerging market currencies may play second fiddle to their developed market rivals this week. That said, global risk appetite may be the primary driver of EM FX performance this week.

Last week’s risk-off move in stocks and bonds spilled over into the currency market, supporting the safe-haven dollar (NYBOT:DXU143) and yen (CME:J6U14) at the expense of higher-yielding currencies. As long as there are no negative shocks this week, that move may be partially unwound, providing a potential short-term bid for EM FX.

How Now, China?

Any time we discuss emerging markets, China looms large. As one of the world’s largest and fastest-growing economies, China’s economic output has a massive impact on global economic performance, especially among smaller, commodity-oriented economies.

With that in mind, this weekend’s People's Bank of China Q2 monetary policy execution report held special importance for EM FX traders. The central bank came off as generally neutral, describing first half economic performance as “stable” and expressing optimism that growth could accelerate in the second half of this year. Crucially, the bank appeared more concerned with the recent uptick in inflationary pressures, a development that may limit the bank’s ability to stimulate economic growth moving forward.

To that end, China’s Services PMI data (Tuesday), Trade Balance (Saturday), and inflation figures (Saturday) will go a long way toward setting the market’s appetite for EM currencies in the weeks to come. Any upside surprise in Chinese CPI (currently expected at 2.3% y/y) could put a damper on the performance of export-oriented emerging markets.

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