The foreign exchange market is buzzing with activity as the year draws to a close, and emerging market (EM) currencies are taking center stage. But here's the big question: will the renminbi's strength continue to set the tone for the entire EM currency space?
FX:
EM currencies are ending 2023 on a high note, benefiting from lower policy rates, a slightly weaker US dollar, and attractive carry trade opportunities. The spotlight is on the renminbi, with USD/CNH approaching 7.00, despite disappointing Chinese activity data. This strength is attributed to China's impressive $1 trillion trade surplus in the first 11 months of the year, leading to speculation about exporters' FX earnings. However, a debate is brewing: should authorities allow the renminbi to appreciate to shift the economy from exports to domestic demand? Interestingly, the People's Bank of China (PBoC) is setting USD/CNY higher than model-based estimates, a rare move compared to recent years. ING's Greater China economist, Lynn Song, predicts the PBoC will resist a stronger renminbi, but pressure could mount in 2026 if the Fed cuts rates further and the dollar weakens.
USD:
Today's focus is on the delayed NFP jobs report for October and November. Expectations are for a modest job increase and a higher unemployment rate for November. These numbers are unlikely to significantly impact Fed policy, as markets anticipate a 25bp rate cut by April and another by September. US money markets have reacted to the Fed's T-bill buying plans, allowing dollar hedging costs to drop. US retail sales data and S&P PMIs are also on the agenda but are unlikely to cause significant dollar volatility.
EUR:
The eurozone PMIs take center stage ahead of the ECB meeting on Thursday. With encouraging industrial production data, lower energy prices, and the potential delay in phasing out combustion engines, the eurozone's terms of trade are improving. This is a clear positive for the euro. EUR/USD could find support at 1.1720/25 if NFP data is strong, but a break above 1.1780 could target 1.1800/1820.
HUF:
The National Bank of Hungary is expected to keep rates unchanged at 6.50%. The focus will be on its new forecasts and forward guidance. While revisions to 2025 GDP and inflation forecasts are minor, the extended price shield measures and increased fiscal targets may impact the 2026 outlook. A stronger forint and lower energy prices also play a role. ING anticipates a reduced 2026 inflation forecast and a potential upward revision for 2027. The market remains hawkish, pricing in almost three rate cuts, but ING sees a dovish risk. EUR/HUF stabilized yesterday, but a weaker forint is possible if the NBH signals a shift.
CZK:
The new government's appointments brought mixed news for the Czech crown. While the commitment to keep the public deficit below 3% of GDP is positive, the absence of fiscal easing is a concern. Lower inflation and potential rate cuts from the CNB could impact the currency. The CZK range seems fair for now, but liquidity returning in January may lead to lower rates and pressure on the koruna.
And here's the part most traders are curious about:
Will the renminbi's strength continue to influence other EM currencies? As we head into 2026, the interplay between global economic factors and local policy decisions will be fascinating. What's your take on the renminbi's role in shaping the EM currency landscape? Is it a reliable indicator, or are there other factors at play? Share your thoughts and let's spark a conversation!
