EM Rundown: Chinese GDP, Ukrainian Frenzy

Stop me if you heard this one before: The performance of emerging market currencies this week will hinge heavily on the latest economic data out of China and geopolitical tensions in Russia. These two hotspots have been the biggest drivers of trade for the first 3.5 months of 2014 and may be particularly impactful in this low-liquidity holiday week.

China: Will GDP Ameliorate Traders’ Concerns?

In China, traders are on tenterhooks ahead of this week’s regular quarterly “data dump” from the world’s second-largest economy. Over the next few days, we will get reports on GDP, Industrial Production, Fixed Asset Investment, Retail Sales, and New Loans among others, but the marquee release will be the Q2 GDP report. Chinese officials have set an official target of 7.5% growth, but given the weak Manufacturing data of late, many traders are expecting a print closer to 7.3%, which would mark the lowest reading since April 2009.

Interestingly, the growing consensus around a possible sub-7.5% reading has set a very low bar to clear, and if China manages to squeak out 7.5% growth (especially if confirmed by other decent data out of China), China bears may be forced to close out their trades. Obviously this report will affect the USD/CNH, which at a 14-month high above 6.22 as we go to press, but the reverberations will also be felt in many other emerging markets, including South Africa, Brazil, Singapore, and Mexico, so traders of all stripes will be glued to their monitors at 0200 GMT on Wednesday.

Russia: Will The Situation in Eastern Ukraine Finally Boil Over?

The other potential storyline to keep an eye on this week is the escalating unrest in Eastern Ukraine. Over the weekend, Ukraine’s interim President Alexander Turchinov set an ultimatum demanding that the pro-Russian supporters who had captured government buildings in several eastern Ukraine cities surrender immediately. That deadline has since come and past with no meaningful response from the Ukranian military, further emboldening the rebels. With Russia threatening to send in its army, ostensibly to protect ethnic Russians in Eastern Ukraine from violence, the parallels to the developments in Crimea are uncanny.

Thus far, traders have generally taken the latest developments in stride, though the Russian ruble has come under a bit of selling pressure today. Looking to the daily chart below, the USD/RUB has ticked up to test psychological resistance at 36.00 level and the MACD is crossing above its signal line once again. If the recent tensions in Ukraine devolve into outright violence, the USD/RUB could break above this area and approach resistance at 36.33 (78.6% Fibonacci retracement), 36.70 (previous resistance) or even 36.90 (the all-time high in the pair). Meanwhile, near-term support is possible near 35.45 (previous support) or 34.90 (the 2-month low).

With many traders out on holiday ahead of Eastern weekend, volume in the market will likely remain subdued this week. Therefore, a unexpected result from either Chinese economic data or the situation in Ukraine could lead to a larger move than many expect.