It’s been another rough day for some emerging market currencies. The South African rand fell to a record low versus the dollar, while the Columbian peso is the weakest performer in the emerging space, and the Norwegian krone has fallen to a 5-year low versus the euro.
This sell-off is notable because the dollar has fallen at the same time. Wednesday’s decline in the dollar is not exactly unexpected after such a large increase, and some hesitation around the 90.00 level in the dollar index is perfectly normal during an uptrend. However, the striking thing is that this pause in the dollar uptrend hasn’t translated to a slowdown in the pace of declines for some EM currencies or the oil price. Brent crude made a fresh 5-year low earlier and slipped below $65 per barrel, after Opec cut its forecast for oil demand for next year.
The South African rand shrugged off USD weakness and fell to a record low versus the dollar, earlier. This came after inflation came in a touch weaker at 5.8%, vs. the 5.9% expected. Interestingly, a falling oil price should be good news for the rand as South Africa is an oil importer. If the cost of its imports decline then it could reduce pressure on South Africa’s already large current account deficit, which currently stands at 6% of GDP.
So why is the market not reacting to this “good” news for South Africa? It could be because the market is not convinced about the economic management in South Africa, which makes the currency vulnerable in an environment when the market is in no mood to tolerate weakness in a currency’s fundamentals. The decline in the rand could also be driven by market expectations that the South African central bank (SARB) will refrain from hiking rates now that inflation seems to be dropping.
However, the Russian rouble has also been declining today even though the market expects Russia’s central bank to hike rates by 100 basis points to 10.5% at its meeting on Thursday.
So what factors are driving emerging markets lower?
It seems that EM FX is damned whatever the conditions, and the market is just in the mood to sell. Although currencies including the rand and ruble have fundamental problems that could limit any upside, the selling pressure could be at an unsustainable level, thus these currencies could be due a pullback.
Whenever the market becomes obsessed with something, it should make a trader suspicious. I am not saying that the RUB or the ZAR will embark on long-term recoveries, I don’t think that they will, however, I do think that they could be at risk from a pullback in the next day or so, especially as positions are so stretched in one direction.
Thursday’s expected rate hike from the Russian central bank could stem the outflow from the Ruble, at least in the short term, so any RUB bears should watch out. The record low in the ZAR could also signal that the market is ready to take a breather, and as we close the European session, USDZAR has backed off its highs of the day at 11.60. Key support from here lies at 11.40 – a former resistance level – which could attract some buying interest (see figure 1).
Takeaway:
- Emerging market currencies have come under pressure once again.
- However, the sharp downside has occurred at the same time as the USD has moderated.
- Although there are still plenty of fundamental reasons to sell the RUB and the ZAR, they could be stretched to the downside and may be due a pullback.
- Watch the RUB on Thursday, as the Russian central bank is expected to hike rates. A larger than expected hike could spark a mini-recovery in the RUB.
- ZAR could take a breather before embarking on another leg lower. Key support in USDZAR lies at 11.40.
Figure 1:
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