NOW YUAN IS IN THE ELITE CURRENCY CLUB, BUT EURO DOESN'T LIKE IT

The worst year for the euro can be even sadder: International Monetary Fund has included the Chinese yuan in the basket of reserve currencies. Now euro zone currency’s weighting in the IMF’s SDR basket will drop to 30.93 percent from 37.4 percent, the organization said yesterday. The yuan will join the dollar, euro, pound and yen in the SDR from Oct. 1, 2016. Its part will be approximately 10-11 percent.

This year the euro has tumbled 13 percent against the dollar yet, and central banks have reduced the proportion of the currency in their reserves to the lowest since 2002. European Central Bank President Mario Draghi signaled that they are open to boosting stimulus on the next ECB meeting.

“The euro will get the most impact from this weight adjustment,” said Douglas Borthwick, head of foreign exchange at Chapdelaine & Co. “The IMF is taking from euro to give to China; the other rebalancing amounts are largely negligible.”

Most likely, China’s yuan will exceed yen and sterling in the new IMF's basket. The levels will be 41.73 percent for the dollar, 8.33 percent for the yen and 8.09 percent for the pound, the IMF said.

It’s the first change in the SDR’s currency composition since 1999, when the euro replaced the Deutsche mark and French franc. The IMF reviews the basket every five years and rejected the yuan during the last review, in 2010.

The euro has dropped 5.3 percent this quarter against the dollar, it was at $1.0602 as of 13:15 GMT after reaching a seven-month low of $1.0558 on Monday.

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COMMODITY-EXPOSED CURRENCIES LOWER AS CHINA STOCKS DROP

Commodity-dependent currencies like the Aussie and kiwi fell on Wednesday as Chinese stocks slid, while trade data from Japan hinted at a recession approaching the world's third-largest economy.

The yen dipped against the dollar and the euro after Japanese exports showed at the slowest pace of growth since mid-2014 mainly due to weakness in China. That also raised chances of more quantitative easing from the Bank of Japan.

USD/JPY was last at 119.92, up 0.05%, while EUR/JPY traded at 136.19, up 0.14%.

The Australian dollar, which is used as a more liquid proxy for Chinese investments because of Australia's strong trade links to China, dipped 0.57% to $0.7218, while the New Zealand dollar fell 0.33% to trade at $0.6730.

The drop came as the Shanghai Composite closed more than 3 percent lower. Other emerging market stocks also fell after recent data pointed to a dim growth outlook.

European stock markets got rid of initial gains in the London session, with Europe's benchmark gauge falling 0.2%.

Elsewhere in the currency trading, the euro was up 0.18% to $1.1365, adding to Tuesday's gains.

Traders believe the euro will suffer from modest volatility ahead of the ECB policy meeting on Thursday. While the ECB is not likely to ease this month, investors expect the central bank to hint at more stimulus later this year.

Data released on Tuesday showed that euro area banks had loosened their lending standards more than expected over the last few months despite volatility in the global markets. That slashed the need for the ECB to expand its 1 trillion euro asset purchase program.

Meanwhile, the Canadian dollar fell with USD/CAD last up 0.17% to 1.3005. The main focus is now on the Bank of Canada's policy decision due on Wednesday with most analysts predicting the policy to stay unchanged.

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CHINA SHOWS SLOWEST ECONOMIC GROWTH SINCE 2009, AUSSIE STEADY

The Australian dollar was slightly higher against the vulnerable U.S. peer on Monday, as data showed that Chinese growth showed the slowest pace in the third quarter since 2009.

AUD/USD hit 0.7290 during late Asian trade, the session high; the pair subsequently consolidated at 0.7268, up 0.03%.

The Aussie was lower against the euro, with EUR/AUD rising 0.06% to 1.5628.

The New Zealand dollar was last lower against the greenback with NZD/USD trading at 0.6804, down 0.10%.

EUR/NZD was last at 1.6709, up 0.31%.

Earlier Monday, official numbers showed that China’s economic growth slowed to 6.9% in the third quarter, down from 7% in the previous one. This is the country's slowest growth rate since 2009.

China is Australia's biggest export partner.

Meanwhile, sentiment on the dollar remained fragile after the release of mixed economic reports from the U.S. on Friday.

The preliminary reading of the University of Michigan’s consumer sentiment gauge came in at 92.1 compared to expectations of 89 and up from 87.2 in September.

But another report signaled that U.S. industrial production dipped 0.2% in September, under pressure due to weakness in the oil and gas sector, as well as the strong dollar.

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CHINA'S THIRD-QUARTER GDP DATA: FIVE KEY THINGS TO MONITOR

China’s economic downturn is weakening commodity prices and hurting global economies and businesses alike. A fresh look at just how sharp the slowdown is will be presented on Monday when the country releases third-quarter GDP data. There are several important things to watch:

Hints at more stimulus

China's Premier Li Keqiang is targeting real gross domestic product growth in 2015 of “around 7%”, following actual growth of 7.3% in 2014.

Economic expansion in the first two quarters corresponded to the government target exactly, at least according to its own reports. But analysts expect the rate to decline to 6.7% in the third quarter, which would be the slowest since the trough of the financial crisis. The spokesman for China’s statistics bureau said in September that he believed growth as low as 6.5% would still be considered within the target range. Nevertheless, if it falls below 6.7%, calls for more aggressive stimulus will be more persistent.

GDP deflator

The GDP deflator converts nominal GDP to real GDP by stripping out inflation. Analysts have long suspected that China's statistics bureau manipulates it to forge the closely monitored and politically sensitive headline growth figure. Understating inflation aims to make real growth appear faster than it is. In the first quarter, the deflator was negative at -0.33, which meant the economy was in outright deflation but renewing doubts about its accuracy. It climbed back to positive territory at 0.09 in the second quarter. Another negative reading in the third quarter would again spur concerns about whether the deflator is being used to ease the appearance of volatility.

Doubts about data accuracy

After July’s GDP data release, the spokesman for China’s National Bureau of Statistics took the unusual step of publicly addressing skepticism about China’s official figures - especially the deflator issue. A column in the official People’s Daily newspaper then came. It offered a somewhat more detailed defence of the methodology the bureau uses. If the NBS again speaks to critics at its quarterly press conference, it will unveil how sensitive it is about overall skepticism, the Financial Times says.

Services

The Financial Times reports that Chinese services have become a new driver of growth against the backdrop of slowing manufacturing and construction. Services increased 12.1% in nominal terms in the second quarter, well above 7.1% nominal growth for the economy as a whole. Beijing is actively inspiring this transition. But services growth has been driven by one-off factors, particularly the stock market boom early this year in which securities brokerages raked in huge trading commissions. With the stock market turmoil in the third quarter, growth in financial services almost certainly shrank. Economists will be watching to see if other emerging service sectors such as healthcare, tourism and media can smooth the slowdown.

Fixed assets

Investment in fixed assets remains the backbone of the world's second largest economy, accounting for 44% of overall output in 2014. It also supports global demand for commodities like base metals. But with the property market still stuck in oversupply, investment in housing continues to be hampered. Beijing has tried to fill the gap this year by driving spending on infrastructure such as railways and water treatment. Infrastructure investment rose at a rate of 18.4% a year during the first eight months.

Data to be released Monday will show how aggressively the government is seeking stimulus through infrastructure.

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LONDON STOCKS DIP AFTER CHINA NUMBERS; U.K. INFLATION DATA ON TAP

U.K. stocks dropped on Tuesday, with commodity-related shares pressured after Chinese export data highlighted concerns about a downturn in the world’s second-largest economy.

The FTSE 100 dropped 0.65% to 6,330.03. The fall was led by pullbacks in the basic materials and oil and gas sectors, which are sensitive to economic data from China, a major buyer of natural resources and related products.

Data released earlier showed that China's trade surplus widened to $60.3 billion last month from $60.2 billion in August, compared to estimates for a surplus of $46.8 billion.

Chinese exports slumped 3.7% from a year earlier, better than forecasts for a decline of 6.3%, while imports dropped 20.4%, far worse than expectations for a drop of 15.0%.

Among miners, shares of Glencore PLC  were down 4.7% and Anglo American PLC lost 3.2%.

Oil major Royal Dutch Shell PLC shares dipped 2.1%.

Meanwhile, SABMiller shares rose 9% after the beermaker’s board agreed to the key terms of a sweetened potential takeover offer by rivla Anheuser-Busch InBev NV. A deal would value SABMiller at £68 billion.

In the banking sector, shares of Barclays PLC were lower 1.4%. The lender is expected to name Jes Staley, a former J.P. Morgan Chase & Co. executive, as its next CEO.

In the currency market, GBP/USD was 0.34% lower at 1.5297 and EUR/GBP was at 0.7453, up 0.74%.

Market players will watch for U.K. inflation figures for September, due at 9:30 a.m. London time, or 4:30 a.m. Eastern Time.

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WILL CHINA LEAD THE WORLD TO ANOTHER RECESSION? CITIGROUP RESPONDS

If the global economy slips into a moderately deep recession next year, it will most likely be dragged down by shrinking growth in major emerging markets - especially a recession in China, says Willem Buiter, chief economist at Citigroup.

Buiter, who is also a former member of the Bank of England's interest rate-setting committee, said in a note that the bank believes there is a high and rising likelihood of a Chinese, emerging market and global recession scenario playing out.

Worries over a steep slowdown in China's economy - the second largest in the world after the U.S. - has rolled over global markets in recent months.

Deepening those concerns, data issued on Tuesday signaled the country's dollar-denominated exports dropped by 5.5 percent in August from a year earlier, while imports plunged almost 14 percent.

Although, a global recession is not yet reflected in Citi's benchmark forecasts for global or Chinese growth in 2016, Citi's global economics team has supported this view.

In his opinion, what is more likely is global real gross domestic product growth (GDP) dipping consistently over the next few years, dropping to or below 2 percent around the middle of 2016.

He also noted, however, that the possibility of some kind of recession, moderate or severe, was 55 percent.

If the world economy slips into a recession, generally identified by two straight quarters where GDP falls, it will be the emerging markets. Particularly, China will lead the road, Buiter said.

"We consider China to be at a high and rapidly rising risk of a cyclical hard landing," the Citi note said.

"The reasons behind China's downturn and likely recession are familiar from the long history of business cycles everywhere: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets."

One of the asset markets Citi referred to was the equity market. Having soared some 60 percent between the start of the year and June, China's benchmark Shanghai Composite gauge then dropped sharp and fast.

Earlier this week, China revised down its forecast for economic growth this year to 7.3 percent from 7.4 percent.

Buiter said that if China enters a recession, many emerging markets will probably follow.

"The advanced economies or developed markets (DMs) will not have enough resilience, either spontaneous or policy-driven, to prevent a global slowdown and recession, even though many large DMs will not experience recessions themselves but will merely grow more slowly," he added.

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11 CURRENCIES THAT MAY FALL AFTER THE YUAN AND TENGE

On Thursday Kazakhstan has shocked global markets - its national currency was plunge on 23 percent. Kazakhstan abandoned control of tenge rate. Vietnam also devalued the dong, while freely traded currencies (the South African rand and Turkey’s lira) extended losses.

The trigger for the wave of depreciations was China’s decision to weaken the yuan on Aug. 11. That added to the woes of emerging markets already reeling from a looming increase in U.S. interest rates and weakness in oil prices.

There are some currencies that are among those most at risk from this conflux of global developments:

- Saudi Arabia’s riyal. Saudi Arabia has about $672 billion in foreign reserves, but speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low.

- Turkmenistan’s manat. This nation with close economic ties to Russia devalued its currency by 19 percent in January. Analysts from SEB AB wait for further weakening a 20 percent in the next six months.

- Tajikistan’s somoni. The country has close ties with Kazakhstan and so SEB expects a depreciation of 10 to 20 percent.

- Armenia’s dram. The currency has lost 15 percent in the past year, compared with a 46 percent drop in the ruble. A quarter of the country’s trade is with Russia.

- Kyrgyzstan’s som. The weaker tenge will put pressure the som because of this country’s ties to Kazakhstan.

- Egypt’s pound. Traders are betting the pound will weaken about 22 percent in a year.

- Turkey’s lira. It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.

- Nigeria’s naira. The currency will fall more than 20 percent against the dollar over the next year, traders think.

- Ghana’s cedi. Ghana is also an oil exporter, but its main problems are mainly fiscal imbalances, rising inflation and increasing debt.

- Zambia’s kwacha. The country is heavily exposed to China as copper accounts for about 70 percent of exports.

- Malaysia’s ringgit. The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.

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