The global phenomenon that is emerging market currency weakness is showing no signs of letting up, with these currencies continuing to receive punishment from multiple different directions. Both the Malaysian Ringgit and Indonesian Rupiah have hit further milestone lows in recent days, but it is essential to point out that this an ongoing round of weakness which is hitting the global emerging markets and truly taking no prisoners. Emerging market currency weakness has become a trend that has ripped apart the currencies of Brazil, Chile, Columbia, Indonesia, Malaysia, Mexico and South Africa to name just a few. The main issue the majority of these currencies face is that they are being pressured by a number of different directions and most of these pressures are external, meaning that they are vulnerable to weakening further.

The emerging market currency weakness is no longer just linked to the US interest rate outlook, and investors really need to begin focusing their attention elsewhere for clues on where these currencies are going to find a floor in selling. The bottom line is that it is inevitable that the Federal Reserve will raise interest rates, the data from the US is consistent and this is proving that its economic recovery is sustainable. Where the woes for the emerging markets really lie, and what is speeding up the decline in their currency, is the resumption of selling throughout the commodity markets and the ongoing threat that China is entering a deep economic downturn. Recent data from China has been far from convincing and it currently looking likely that the China economy is vulnerable to falling below the 7% government GDP target.

It is the risks from China that will represent the largest risks to the emerging market currencies as we continue into the second half of the year, mainly because recent data has been alarming and raised suspicions that the China economy is vulnerable to slipping below the government GDP target at 7% before the end of the year. This would create panic over the health of the global economy and in particular, further the woes for emerging market currencies that have already received brutal punishment throughout this year. The correlation between alarm bells ringing over China economic data and resumed selling in commodities is one of the easiest trends to spot in the currency markets, and it furthers the weight to investor sentiment for emerging market currencies that have already been punished by a variety of factors.

This might surprise some, but my actual take on the possibility of China economic growth falling below 7% is that it is not that disastrous from the point of view from China itself, but it is alarming for other countries. China is in a transitional stage where it is attempting to move away from a reliance on mining and construction and develop a stronger footprint on other domestic sectors. It is the economies who are reliant on trade with China who would be the most tested from weakening China growth, mainly because they would have to handle the decline in China trade. The timing of weaker exports from China could not come at a worse time for emerging market economies though, bearing in mind that their currencies are already under repeated pressure due to the positive interest rate outlook in the US and dramatic decline in commodity prices.

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