Various measures of volatility in the financial markets remain historically high, but have come down from the record highs seen in October and November. As a result, many emerging market currencies like the Turkish lira and Mexican peso have managed to gain over the past week.
South African Rand Gains Along with Mexican Peso, Singapore Dollar Despite SARB’s 50bp Cut to 11.5%
Various measures of volatility in the financial markets remain historically high, but have come down from the record highs seen in October and November. As a result, many emerging market currencies like the Turkish lira and Mexican peso have managed to gain over the past week. That said, looking at longer-term charts, the latest price action represents a consolidation of these currencies above their record lows, rather than a clear reversal. Thus, it may only take another jump in volatility to lead these pairs to break out once again.
One of the biggest pieces of news for the emerging market currencies we follow was today’s rate cut by the South African Reserve Bank (SARB). The SARB cut rates in line with expectations by 50 basis points to 11.50%, but the more important part was that this was the first reduction in interest rates in over three years. Similar to countries like Turkey, CPI in South Africa remains well above the central bank’s 3% – 6% target at a whopping 12.4% as of October. However, with commodity prices down significantly and domestic and foreign demand waning, Governor Tito Mboweni said he expects that inflation will return to the bank’s target range by Q3 2009, averaging 6.2% for 2009. The SARB’s actions may signal that there will be more rate cuts to come for other emerging market economies, many of which have left rates at historically high levels in order to combat inflation and to avoid major selloffs in their national currencies. The encouraging part of the SARB’s rate decision? The South African rand actually gained versus the US dollar following the announcement, suggesting that banks like the Central Bank of the Republic of Turkey (CBRT) have nothing to fear.
Mexican Peso – Economic indicators out of Mexico this week are generally anticipated to reflect a slowdown in growth. On December 17, Industrial Production is expected to fall to a 7-month low of -2.1 percent in October from a year earlier, compared to -1.84 percent in September. On December 19, the unemployment rate for the month of November is forecasted to slip to 4.05 percent, which may help to explain why Mexican consumer confidence improved slightly during the same period. Nevertheless, there is little doubt that the Mexican economy is feeling the impact of the global slowdown and recession in the US, as Q3 GDP slowed to a 5-year low of 1.6 percent from 2.7 percent.
Turkish Lira – There are a variety of economic indicators due to hit the wires next week, including the unemployment rate and GDP, both of which are likely to reflect weakening conditions. The key thing to watch though will be the Central Bank of the Republic of Turkey’s (CBRT) next rate decision, as it has the potential to be extremely market-moving. The CBRT is grappling with the same issues that most central banks are facing: slowing growth and relatively high measures of inflation. However, CPI has started to fall and given the plunge in commodities, inflation pressures are expected to ease further throughout 2009. As a result, there is potential for the CBRT to cut rates by 50 basis points for the second straight month on December 18, especially since their last rate cut didn’t yield the sharp sell-off in the Turkish lira that many feared.
South African Rand – This week, CPI and PPI figures for South Africa are expected to reflect one thing: easing inflation pressures. However, seeing as though the South African Reserve Bank (SARB) has already indicated that they expect inflation to fall back into the their 3% - 6% target range, the news may not be very market-moving for the South African rand.
Singapore Dollar, Hong Kong Dollar – Trading of these two currencies may have more to do with price action for the US dollar, but from an event-risk perspective, there is little to move the Singapore Dollar and Hong Kong Dollar. However, traders should keep an eye on Singapore’s retail sales figures, as they have the potential to disappointing and signal that recession for the economy will extend through Q4 as well. Meanwhile, Hong Kong’s unemployment rate is forecasted to rise to a one-year high of 3.7 percent on December 18, while composite interest rates may rise further given persistently tight credit conditions.
USD/ZAR continues to consolidate below its October highs, and if the US dollar weakens further and risk appetite picks up, emerging market currencies like the South African rand could benefit. From a technical perspective, a break below trendline support at 9.8250 would signal potential for a USD/ZAR decline to target 9.4901 in the near-term, and perhaps even 8.9767. On the other hand, a resurgence in risk aversion and plunge in the equity markets could lead USD/ZAR to surge higher once again.
Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com
