Global Markets: Commodities Currencies Get Hit; + Japan’s Threat To Asia’s Sovereign Ratings
Emerging market (EM) currencies were hit hard this week, as the US dollar strengthened amid fears of a withdrawal of Federal Reserve stimulus and indications of a renewed slowdown in China.
Particularly hard-hit were commodity currencies, because, in line with our long-standing view, the outlook for commodity prices has deteriorated. Indeed, among EM FX, Latin American currencies were hit hardest, with the Brazilian real and Peruvian sol selling off sharply to multi-month lows.
With this in mind, we reiterate our overall view that the US dollar index has further to run to the upside in the coming years, though this will take place mainly against developed world currencies. Chief among the losers will be the euro, but, as with Latin currencies, we see weakness ahead in developed world currencies that had previously benefited from the commodity boom – namely, the Canadian and Australian dollars. CAD/US$ hit an 11-month low this week, touching CAD1.04/US$, and a break of that level would suggest weakness to CAD1.08/US$ and beyond. Similarly, we reiterate our bearish view on the Australian dollar, with our long-term US$0.8000/AUD target still in play. In the short term, we see downside for the New Zealand dollar versus AUD as the latter consolidates, but both are overvalued and due for a fall.
Japan Poses A Major Risk To Asia’s Sovereign Ratings
Meanwhile, also in Business Monitor Online this week, we published the latest quarterly update of our sovereign risk ratings for Asia. The main theme is the risk posed by Japan to Asia’s sovereign creditworthiness. With the Japanese economy making an important transition away from its deflationary/strong currency/low interest rate equilibrium, Emerging Asia is facing multiple risks. From a macroeconomic standpoint, Japan represents a major export market for many countries across the region. It is also a key input source in regional manufacturing processes, and is a large foreign direct investor in Asia. So far, ‘Abenomics’ has been successful in providing a boost to economic growth momentum in Japan. Import and export figures have rebounded in recent months, and there is no sign yet of the hangover effects of these policies (notwithstanding sharp falls in the Nikkei lately). Additionally, financial markets across the region are viewing the developments in Japan as positive, with credit markets very stable, currencies only seeing minor weakness, and equity markets seeing continued strength.
However, the world’s third-largest economy could begin to buckle under the weight of its huge government debt burden, as the monetary authorities lose control of the bond market. As inflation expectations in Japan continue to rise, the Bank of Japan could find itself in a catch-22 situation, having to buy more bonds in an attempt to stabilise the market, thus putting currency stability severely at risk. Such a loss of control of the world’s largest bond market could trigger a wave of economic and financial market turmoil across the region. We have made some adjustments to our Sovereign Risk Ratings to reflect the risks posed by a Japanese crisis, with a number of countries receiving downgrades in the ‘ability to pay’ category.
This Week’s Trivia Question
Last week, we asked, which 1980s American soap opera had a season cliffhanger in which all the characters appeared to perish in the massacre of the royal family of a quasi-fictional European country, and what was that country? (We chose that question because BMI‘s Senior Economist went there over the bank holiday weekend.) And, what is the connection between this fictional ‘massacre’ and the former Serbian royal family, and, surprisingly, the film version of Starship Troopers? The answer to the first part is Dynasty, and the second part, Moldova (then known as Moldavia). In the season 5 cliffhanger, one of the characters, Amanda Carrington, marries the Prince Michael of a fictionalised version of Moldavia (which was then a constituent republic of the USSR and thus had no monarchy). At the wedding, anti-royalist commandos storm the chapel, seemingly killing everyone. However, when season 6 began, it turned out that only two minor characters died, and everyone else just suffered gunshot wounds to their arms or shoulders. The actress who portrayed Amanda was Catherine Oxenberg, who in real life is the daughter of a Serbian/Yugoslav princess. She is married to actor Caspar Van Dien, who played the hero in Starship Troopers (the subject of the previous week’s trivia question).
This week, something much more mundane: In which European country is China currently building a new city (or manufacturing and industrial zone, more accurately) in the suburbs of the capital? And who was arguably the most famous foreign resident of that capital city? (Hint: he lived there in the early 1960s and was responsible for a high-profile assassination.)