Competing factors for EM FX

Higher US yields and tighter credit in China the negatives

Chart of the Day

EM currencies have risen against the USD in the past week, and some investors say this should continue given the likelihood of a further global economic recovery. But as well as impacting commodities as we saw yesterday, Chinese credit conditions can weigh on emerging market currencies - partly because many EMs produce commodities, and partly because there is less capital available to flow into those countries generally. At the moment, the tightening of Chinese credit conditions is coinciding with a rise in US bond yields, which could compound the problem for EM currencies as relative interest rates move against them.

Macro

The Empire State manufacturing survey rose to 17.4 in March. That could put upward pressure on the ISM manufacturing index this month, although the ISM is already higher than the Empire State survey alone would suggest.

Canadian manufacturing sales rose by 3.1% MoM in January. Growth was weaker after accounting for price changes.

In India, wholesale inflation rose to 4.2% in February, which could cause problems for the central bank which targets consumer price inflation 4%.

Markets

The Dow Jones Transportation Average performed similar to the S&P 500 yesterday, with a rise of 0.6%, but has clearly pulled away in the last month or so as traders price in the recovery.

Stocks do not seem too bothered by the fact that, at 1.45%, the S&P 500 dividend yield is lower than the 10-year bond yield at 1.6%.

Moves in the main EV stocks in the past week have ranged from a 15.0% rise in Workhorse to a 27.6% increase in Nio, but in the past couple of days the stocks have moved in varying directions.

The semiconductors seem to be rebounding more convincingly, perhaps due to the global shortage. Moves in the main semiconductor stocks in the past week have ranged from a 6.6% rise in Intel to a 13.8% increase in Nvidia.

The USD has depreciated against most currencies in the past week.

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