EM Rundown Greece is Small China is Big

In last week’s EM Rundown we explored which EM currencies were most vulnerable to a potential Grexit, and while a Greek exit from the Eurozone looks more likely than ever, there is a much bigger risk for EM FX emanating from China, whose economy is roughly 40 times larger than that of Greece.

Over the weekend, China intensified its efforts to bolster confidence in its equity market, which has fallen a staggering 30% in just the last three weeks alone. Specifically, the Chinese government suspended IPO and relaxed requirements on margin loans; the People’s Bank of China (PBOC) announced that it would work to inject funds into brokerage firms; and China’s brokerage firms pledged to invest 120bn yuan ($19bn) into the Shanghai Composite Index as long as it remained below 4,500 (currently trading at 3,775).

This coordinated “throw-everything-including-the-kitchen-sink-at-the-market” strategy reveals the government’s deep concern that the stock market collapse could spread throughout the rest of the economy, including into the frothy real estate market. Though bold, these measures may not be enough to stem the equity traders’ panic-driven selling stampede: even this morning’s big 8% bullish gap faded throughout the day, with the index closing just 2.4% higher from Friday. If this latest round of measures is unable to stabilize sentiment, the resulting financial carnage could spill over to other regional economies and impact global risk sentiment on the whole.

Among the major emerging markets, the countries with the highest proportion of exports to China are Russia (8.1% of total exports), South Africa (8.3%) and Singapore (14%). Not surprisingly, USDRUB, USDZAR, and USDSGD are all trading higher on the day. USDRUB in particular looks bullish from a technical perspective, with rates approaching the 3-month high around 57.00 after breaking out from a bullish flag pattern. With the MACD trending higher above its signal line and the “0” level and the RSI indicator not yet overbought, a continuation toward the 57.00-58.00 area could easily be in play this week. Meanwhile, only a break below last week’s low at 54.40 would bring the near-term bullish bias into question.

Source: City Index

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.