Currencies globally declined sharply after China on Thursday devalued its currency to a five-year low against the USD. China is facing large capital outflows as its economy slows and its stock markets corrects from bubble levels. Despite the large trade surplus and extensive capital controls, China had to spend hundreds of billions of dollars of reserves in 2015 in order to limit depreciation of the currency.
China’s foreign-exchange reserves continued to shrink in December 2015, recording the biggest monthly drop ever and falling overall to its lowest level in nearly three years. Data released showed that foreign-exchange reserves fell by USD 107.9 billion in the month of December to USD 3.33 trillion.
PBoC action has fuelled further nervousness over global economic growth outlook. Earlier this week, the World Bank lowered its estimate for global growth to 2.9% from 3.3%, with expectations for just about all major economies being revised downwards. The tepid growth outlook has sent commodity prices to multiyear low level and Brent crude crashing to a 11-year low of 32.20 USD/bbl and is currently trading at 33.55 USD/bbl.
The fall in commodity and oil prices is affecting economies that derive most of their revenues from commodities. Big economies such as Brazil and Russia are seeing recession while countries such as Saudi Arabia are facing issues in balancing budgets. Brazilian Real and Russian Ruble depreciated by 1.59% and 2.89% respectively against USD last week.
USD ended the last week down amid rise in volatility in global financial markets, but remained largely supported by U.S. economic data released last week. USD Index (DXY), which tracks the movement of the USD against six major currencies, declined by 0.14% on weekly basis and closed at levels of 98.54. The index was largely down on Euro strengthening as it constitutes 57.6% weight in the index.
ADP on Wednesday reported that non-farm private employment rose by 257,000 in the month of December against the expectations for an increase of 192,000, followed by 211,000 jobs created in November
A separate report on Wednesday showed that the U.S. trade deficit narrowed to USD 42.37 billion in the month of November from USD 44.58 billion in October and against the expectation of trade deficit to narrow to USD 44.0 billion.
Institute for Supply Management reported that its index of purchasing managers fell to 48.2 in the month of December from a reading of 48.6 in November against the expectation of 49.0 in December
U.S. Department of Labour on Thursday reported that number of individuals filing for initial jobless benefits in the week ended 1st January declined by 10,000 to 277,000 from the previous week’s total of 287,000 against the expectation of a decline of 12,000 to 275,000.
U.S. Department of Labour on Friday released its monthly U.S. job report, which showed that the economy added 292,000 jobs in the month of December, against the expectations of 200,000, followed by 252,000 job additions in November. The U.S. unemployment rate remained unchanged at 5.0% in the month of December, which was in line with the expectations.
Euro appreciated 0.61% last week against the USD after Eurozone released positive economic data. Eurozone Unemployment rate fell to 10.5%, marking a third consecutive drop, as well as beating the expectation of 10.7%. In Germany, numbers were mixed. Factory Orders softened to 1.5%, but beat the expectation of 0.1% rise. Retail Sales gained 0.2%, marking the first gain in four months against the expectation of 0.5% rise. On Wednesday, Services PMIs out of Germany and the Eurozone beat expectations, with both indicators pointing to expansion in the services sector. These solid releases give the ECB some breathing room with regard to further easing steps.
Asian currencies were lower against the USD last week except Yen, which strengthened against the USD as the demand for safe-haven asset rose amid global market volatility and poor growth outlook. Australian Dollar depreciated by 4.79%, New Zealand Dollar depreciated by 4.91%, Japanese Yen appreciated by 2.81%, South Korean Won depreciated by 2.11%, Philippines Peso depreciated by 0.64%, Indonesian Rupiah depreciated by 0.66%, Indian Rupee depreciated by 0.74% against USD and depreciated by 1.53% against Euro, Chinese Yuan depreciated by 1.53%, Malaysian Ringgit depreciated by 2.25% and Thai Baht depreciated by 0.78%.