What’s eating key global currencies? The effects of the fallout of worldwide rate hikes and a slowing Chinese economy explained

The world's key currencies have been subject to significant sideways trading in the last few months, including the euro- dollar, sterling-dollar and yen-dollar.

 

The relatively stable euro-dollar rate is down to relative interest rates between the US and Eurozone staying stable.

 

This is backed up by improving inflation and unemployment in Europe and the Federal Reserve’s continuing postponement of interest rate hikes.

 

At its September meeting, chair Janet Yellen pointed the finger at the Chinese economic slowdown and consequent turbulence overseas as a reason for keeping rates low.

 

The Chinese slowdown will not end just yet, and US inflation is not near its target so it would be no surprise if the rate hike is delayed until March 2016.

 

This will keep the euro-US dollar and sterling-dollar in their stable ranges for quite some time. Elsewhere, it’ll continue to pressurise commodity-producing economies.

 

It has already taken its toll on Australia, Canada and New Zealand, as it has hurt their economic growth and also caused higher unemployment rates.

 

But these pressures should keep inflation contained, and may mean there is further monetary easing in these countries.

 

The Australian central bank is expected to cut interest rates by 30 basis points, which is fair – but there could be much higher rate cuts of 50 basis points if the unemployment rates rise.

 

Meanwhile, in neighbouring New Zealand, the central bank is expected to cut 29 basis points off interest rates over the next 12 months.

 

Again, it would be no surprise if this turns out to be a much stronger easing, with cuts of 50 basis points. Canada too is in recession, as the lower oil price has weighed on its economy.

 

Some experts are even calling for the Bank of Canada to implement QE, as the recent rate cuts have not been enough to help the country’s businesses. 

 

Although markets don’t expect further cuts, if they were to come, the value of these countries’ currencies could decline even further.

 

This would happen independently of any Fed rate rises – but if there are rate hikes in the US, then the decline would be even greater.

 

And this will all play out as long as Chinese data keeps drifting lower. One of the leading indicators, the China Caixin PMI manufacturing index, came in last week at its lowest level since March.

 

The inventories sub-index of the same PMI survey showed Chinese manufacturing firms are having problems selling their current stock, while new orders have declined.

 

Meanwhile, new export orders have fallen – all of which suggests this closely-watched PMI indicator will be even lower in the near future. 

 

With this, of course, comes a slower Chinese economy. And those commodity producing economies – Canada, Australia and New Zealand – will continue to feel the pain.

 

Their currencies will continue to be pushed lower, and their employment rates will also reflect China’s slowdown: there will be more lay-offs.

 

Traders will be shorting the Commodity Block Currencies versus sterling, the euro or dollar.

 

But if the Fed keeps rates lower for longer, this could trigger a reversal in key commodity prices such as iron ore, crude oil and soft commodities – each of which would benefit Australia, Canada and New Zealand respectively.

 

Higher commodity prices will mean less pressure on those central banks to ease policy, and their currencies will do better too.