Daily Currency Briefing: No Chinese fortune cookies

Topics:

EUR-USD does not have much of a life of its own
Loonie recording losses
Turkish current account balance benefits from falling oil price
ZAR: Roller coaster rand
CNY: USD-CNH collapsed due to intervention and elevated carry cost

G10 FX Research

EUR-USD: Unfortunately EUR-USD currently does not have much of a life of its own. Eve-ryone is keeping an eye on China and the stock markets. Risk aversion is in the driving seat at the moment. Last week the disappointing inflation data in Germany and the euro zone had an effect on the markets and affected the euro at least. Now at the start of the week we do not even have any economic data to distract the market from its focus on “risk aversion & China”. The speeches of Fed members do not exactly help these days either. Even if the two hawks Jeffrey Lacker (Richmond Fed) and Robert Kaplan (Dallas Fed) commented yesterday and a moderate hawk Dennis Lockhart (Atlanta Fed) is speaking today, none of them has voting rights in the FOMC this year. Of course we can pass the time by listening to them but they do not get more attention than a brief glance from the FX market as it prefers to concentrate on the markets in China than on comments by FOMC members to get an idea of where EUR-USD is going. And in the Far East the central bank (PBoC) is trying to calm the markets and stabilise the renminbi with the help of artificially low USD-CNY fixings and interventions in USD-CNH (see below). Not exactly fortune cookies from China, but at least something to calm the nerves of the FX markets short term. And while there is no other momentum it has the expected effects: the safe havens yen and euro ease a little, while USD is able to appreciate slightly.

CAD: The Canadian dollar is under intense pressure as a result of the collapsing oil price. The Canadian economy is far less dependent on oil than other commodity exporting coun-tries but if the economic outlook has nonetheless deteriorated according to the winter Busi-ness Outlook Survey carried out by the Bank of Canada (BoC) there is nothing stopping the markets in particular as the oil price is now heading for the USD 30 mark. As a result USD-CAD is trading above 1.42. Of course the even weaker oil price is going to have an effect on the Canadian economy. Central bank governor Steven Poloz put it very clearly the other day: the falling commodity prices and as a result the falling terms of trade have resulted in a loss of income of C$ 1,500 per Canadian since 2014. The resulting weaker CAD is a saving grace for the BoC though as it helps to restructure the economy away from the commodity sector towards other sectors of the economy and supports exporters who benefit from the solid demand from the US. It looks that despite the collapse of the oil price the BoC will stick to its neutral position and not cut the key rate any further as it is looking through the inflation fuelling effect of the bad terms of trade and the weaker currency. The loonie will nonetheless suffer. As a result USD-CAD will remain at higher levels for the time being.


Emerging-Market-Research

TRY: Turkey's current-account balance continued to improve year-on-year in November 2015, although the balance returned to a deficit from a mild surplus a couple of months ago; the headline balance recorded a $2.1bn deficit. The narrowing trend has remained intact for over a year now and reflects lower oil and raw material prices. But, here are the interesting aspects: 1) It is clear that all the improvement has come from lower energy import cost; as chart 1 shows, net of energy and gold imports, Turkey's current-account balance has remained around neutral in recent years. Of course, this does not imply that, in some sense, the 'underlying' current-account is not in deficit – all energy importing countries have to pay for their energy imports with their other exports, hence, to look at the balance excluding energy is meaningless. Nevertheless, the trend does highlight the beneficial impact which lower energy prices are having on Turkey in particular. 2) GDP growth has accelerated sharply over the past couple of quarters, and it now appears likely that the country grew by about 4% in 2015, 1pp faster than our earlier estimate; this implies that the 2015 current-account deficit was closer to 4% of GDP as opposed to the 5% we had earlier estimated. This current-account behaviour, by itself, would have been a significant positive for the lira, but in today's broader EM environment, it has become a secondary factor. This was confirmed again by the capital account data yesterday, which showed a hefty $3bn net portfolio outflow in November.

ZAR: ZAR had a spectacular trading session yesterday, with a trough to peak increase of nearly 10% at one point. Initial reports indicated that the reason for the sudden move higher were a series of stop losses being taken out. To be blunt this doesn’t make much sense. First, it’s hard to believe that any market participants held significant long ZAR positions which were subsequently stopped. If they did then quite frankly they deserved everything they got! More to the point, even if stops were taken out one would assume that USD-ZAR would continue to trade at elevated levels around 18.00, instead we experienced a brief reversion towards levels around 16.50. In the meantime front end volatilities clearly traded at higher levels and indeed we expect this to continue. Bottom line, don’t buy ZAR and steer clear of selling front end USD-ZAR volatilities.

CNY: The CNH market witnessed a wild session yesterday. We saw intensive intervention from Chinese names in the morning session. In the meantime, the CNH overnight HIBOR soared to 13.4% yesterday and 66.8% this morning, hitting record high aggressively, as Chinese regulators suspended the onshore-offshore arbitrage which reduced the capital inflows into CNH market. Liquidity tightness is seen across the curve, and 1Y USD-CNH swap points breached above 3000pips in the afternoon from 2500 pips in the previous day. Therefore the position of shorting CNH has becomes very costly, which triggered strong short covering in CNH market, alongside with the PBoC’s intervention. USD-CNH collapsed by more than 1000pips to 6.57 hurdle and CNY-CNH spread narrowed to negative this morning, which is the first time since last October.

PBoC set USD-CNY fixing at 6.5628 this morning, almost unchanged for the third straight day, which seems to us China’s central bank would want to see some sort of stabilization after the choppy session in the first week of the year. As long as liquidity tightness persists in CNH market, we think that there is little upside in USD-CNH