The combination of divergence and the US policy mix is underpinning the dollar and I was invited to share my views on CNBC’s Squawk Box earlier today. It dovetailed nicely Matthew Diczok (from Merrill Lynch) views on Fed policy and US interest rates. In addition, I note the troubled spot Europe finds itself with German industrial output unexpectedly falling for a third month in August and Italy’s confrontation with the EU over budget issues. Japan is also far from being able to raise policy rates any time soon.
Oil, that John Kilduff speaks to on this clip, has also been rallying strongly. It is an important development, especially for emerging markets, which for the most part are net importers of oil. The rise in the price of oil is further exacerbated by the stronger dollar. This is a powerful headwind for emerging market economies. It boosts measured inflation, acts as a headwind on growth, and aggravates external imbalances.
I also suggest that the global markets appear somewhat less sensitive to Chinese markets recently. The cut in required reserves after a drop in new export orders in the PMI and rising trade tensions with the US has encouraged a more supportive stance by the PBOC. The line drawn at CNY7.0 may be challenged.