This has been a reasonable week for data, positive consumer sentiment numbers in South Korea, Finland and Germany; solid durable goods orders in the United States; a better than expected growth outcome in Singapore. Just the sort of environment for a trend to quietly go about its business. Of all the aforementioned macro news, I am particularly heartened by the Singaporean data, a +2.6% year on year growth rate to the end of Q1 versus 2.2% forecast and 2.1% up to the prior quarter, a clear improvement. I always consider Singapore to be one of those key economies that can shed light on more than itself. It is such a crucial trading economy, and is highly sensitive to global trade and general global economic trends. If Singapore is improving, the chances are the global economy is too.
The Financial Times reports that the IMF now considers the Chinese currency, the renminbi, to no longer be undervalued. This is a departure from the stance still taken by the United States, but it’s a welcome one, and at least theoretically should be free of politics. The last 12 months have seen substantial moves by most currencies against the US dollar, and while the renminbi has weakened slightly, we’re only talking about a few percentage points versus magnitudes more for most others. This means that the Chinese currency has actually appreciated substantially against a basket of currencies, which implies a departure from the mercantilist economic strategy of the last few decades. The Chinese definitely appear sincere in their desire to rebalance their economy to a more consumer oriented and domestic focussed economy. This will greatly benefit the global economy, but these changes are likely to take a generation to come to fruition. In between there (the future) and now, are likely to be many challenges, the like of which the Chinese leadership currently face. One of these soon to be challenges is the impact of U.S interest rate normalisation on the Chinese economy. Indeed this is a question for all emerging markets, and it’s a point that we’ve raised many times before. It could be a bumpy road ahead, and Governor Fischer, one of Federal Reserve’s most senior policymakers acknowledged that there could be some difficulties ahead, as rate rises in the U.S are inevitable now. He did make assurances however that some weight would be given to the likely impact of this important decision on the global economy. Our view is that the Chinese economy will be fine, but there could be difficulties for some Chinese corporates as substantial dollar debt issuance has occurred over the last half decade. It is not clear however that this rises to the level of a systemic threat to either the Chinese economy or indeed the global economy, but you can count on significant volatility ahead. The US policymaker went on to say that the Federal Reserve will make every effort to communicate its intentions ahead of time, which for my money is what they’ve been doing all year anyway!
What does this all mean? It means that the narrative for the bullish US dollar trend is still intact. We might not be quite there yet, the employment data in the United States and specifically wage growth remains of vital importance, but the time for interest rate rises is imminent. It has to be if Fischer’s belief that the Fed funds rate will be in the 3 – 4% range in a few years. For that to happen we have to start soon. I won’t bore you with reasons for a weakening euro narrative. All you have to do is switch on your news channel or pick up your paper. Bottom line the trend of a weaker EUR/USD and by extension a weaker GBP/USD is intact. It’s a question of when not if…
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