The consensus has vociferously been blaming weak Asian currencies on the Fed's 'prospective' rate hike. But they seem to be underestimating the influence from the China factor.
China's drastically slowing economy has many transmission channels. Such can be seen in the ongoing crash in commodity prices, as well as, pressures on financial markets of Emerging Markets through tanking currencies and sluggish equities and bonds.
The Gavekal team provides more evidence of the escalating impact of the China's economic downdraft on Asia's real economy:
In today’s edition of More Evidence of China Slowing Permeating Asia we will focus on the recently released PMI data. Generally all the data tell a similar story – that there is a synchronized slowdown taking place in Asia – though Japan may be bucking that trend somewhat. We also show the data releases from today including Australia unemployment, Thai consumer confidence, and Philippines trade, which all showed notable deterioration in the most recent reading.
Given Asia's export dependent economies, declining PMIs have big links with export conditions. However, imports are generally associated with internal demand. Hence, a slowdown in general imports may likely mean a congruent downturn in internal demand. This seems to be the case for the Philippines.
I have been saying here that the US Federal Reserve has been used by mainstream as a scapegoat for weak currencies. As I wrote last weekend:
The US FED is in a bind. Current string of economic data has not been as vigorous as expected. But the Fed will be left with limited traditional interest rate “tools” when signs of a significant downturn reemerge. So if the FED will increase rates, then it will likely do so conservatively. This will mostly be symbolical rather than intended as policy tightening.Besides, last week’s FOMC statement exhibited indications that the Fed may be moving goalposts anew. The broader coverage of variables for policy assessment makes them look increasingly tentative.
More proof the FED is in a quandary. The Federal Reserve of Atlanta's GDPNOW or real time GDP anticipates 1% growth for Q3 (as of August 6)
From the Fed Atlanta:
The first GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.0 percent on August 6. The model projects that lower inventory investment will subtract 1.7 percentage points from third quarter real GDP growth. Real GDP grew 2.3 percent in the second quarter according to the advance estimate from the U.S. Bureau of Economic Analysis.
By the way things have been unfolding, the Fed actions will either be "ONE and DONE" or that rate hike will be pushed further down the road. Of course, a significant decay in the US economy would mean the re-institution of QEs.
