Afternoon analysis 08.09.2015

Chinese data on foreign trade should be in focus during the Asian session. Why have some EM currencies lost so much value in the recent years? The zloty remains stable but weak readings from China may create some PLN weakness.

China in focus

Trading in recent hours has been fairly calm due to the US closure. Investors are clearly waiting for the Chinese trade data reading. A negative signal for Beijing would be a significant drop in export and a decrease in the surplus of trade balance.

If China announces a slide in export larger than 10% y/y and lower trade surplus, investors might connect it with today's reports on falling Chinese currency reserves by 100 billion dollars.

It may push the Shanghai stock exchange lower which would probably translate to European equities opening and the condition of EM currencies. Taking into account how the euro has recently been traded it would push the EUR/USD above the 1.12 level. Reversing the carry trade on the European currency is supposed to create a demand for the EUR and lower the probability of interest rate hikes in the US, which would create selling pressure on the USD.

EM currencies

Looking at developing countries currencies in the recent three years we should conclude that some moves look spectacular. The Russian rouble lost 50% value. A similar situation was seen on the Brazilian real. A 30% slide was observed on the Malaysian ringgit and Chilean peso. However, not only EM currencies slumped.

The 3-year chart of 11 currencies to the dollar.

Source Bloomberg, own calculations. The chart was normalized to the value of 100. Currency names description from the top to the bottom taken from the left hand side box: Polish zloty, Brazilian real, Russian rouble, Hungarian forint, Malaysian ringgit, New Zealand dollar, Australian dollar, Mexican peso, Chinese yuan, Korean won, Chilean peso.

A significant depreciation was also seen on the New Zealand and Australian dollar. On the other hand, a fairly stable trade was observed on the Korean won despite the fact that its geographical settings are not favourable. Identification of reasons which pushed the currencies lower is not that surprising.

Firstly, it is crucial how many countries are dependant on exporting commodities. It significantly affects the Russian rouble, Chilean peso, Brazilian real and Australian dollar. Additionally, it is not important whether a country exports crude oil (Russian) or diary products (New Zealand). The slump in export revenue creates currency depreciation pressure.

Some movements, however, may also be extended by the internal situation. Regarding Brazil, there is not only an issue with slower export. Improper fiscal policy, corruption and political crises combined with high inflation create the perfect storm for the currency slump.

What is worth noting, despite the fact that some part of the depreciation on Asian or Latin American currencies was the Chinese slowdown, the renminbi was almost unchanged in the last three years. Only a slight depreciation was recorded on the won. The Korean economy is well diversified and it imports commodities so it actually benefits from lower oil. The currency only dropped by 7% in 3 years even taking into account that the dollar gained value in the traded weighted index.

In the 11 currencies the zloty looks fairly good – it is in third place after the renminbi and the won. It is mainly a result of Polish export being well diversified, our country imports commodities and Germany's conditions are solid which also supports the local economy.

Calm on the zloty

The zloty remains stable to most foreign currencies. The situation should not change significantly today especially that there is no US session. Only really weak data from China may push the PLN lower.