EM Rundown: Inflation Jubilation Or Desolation?

 | Nov 10, 2014 03:28PM ET

Markets are off to a quiet start this week as traders try to gather their bearings after the whirlwind of top-tier economic data last week. The US dollar dipped early in Monday’s Asian and European sessions, though the world’s reserve currency recovered to trade generally higher as we went to press. Meanwhile, US equities are trading at all-time highs again (*yawn*), while global bond yields are ticking higher to reverse some of Friday’s losses.

The EMs

Shifting our attention to the emerging market sphere, EM FX traders are focused on the same economic factor as their developed-market brethren: inflation. Price pressures have been limited globally, helped along by falling commodity prices, and as long as inflation remains subdued, central bankers will remain on hold (or even in easing mode).

As my colleague Chris Tedder Monday, inflation figures in China, the world’s second-largest economy, were subdued. Consumer prices rose at just 1.6%, the slowest rate in five years, while producer prices actually contracted by 2.2%, suggesting that price pressures are unlikely to pick up any time soon. Despite this downbeat report, USD/CNH actually fell back to 6.12 Monday after testing its 50-day at 6.1400 on Friday. At this point, the pair looks likely to continue lower until the PBOC takes bold easing action or otherwise signals that the yuan is becoming to strong.

Across the world, traders also got a glance at the latest inflation figures out of Mexico, which showed that prices rose 0.55% m/m in October, roughly in line with expectations. Inflation ticked up to 4.3% on a trailing twelve month basis, signaling that Mexico may actually be one of the few regions where inflationary pressure could prompt central-bank action next year. Looking to the chart, USD/MXN is pressing against a key resistance level at 13.60, but as we noted last week , a break of that barrier could open the door for a rally toward 14 in time.