Written by Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM
Currencies pegged to the US Dollar continue to enjoy further strength across the emerging markets. This trend looks set to remain in place until the final quarter of 2018, at the very least.
The combination of prolonged strength in the US Dollar, fears over a potential global trade war concerning major economies and a recent currency crisis in Argentina and Turkey provide a few of the many reasons why the likes of the UAE Dirham, Saudi Riyal, and Lebanese Pound stand as some of the USD-pegged currencies to have strengthened significantly against the emerging markets.
This has provided a unique opportunity to markets with currencies pegged to the Dollar. Readers will also find encouragement from the positive news that the outlook for emerging markets is that currency weakness will remain as the theme. Not only do emerging markets offer discounted holidays for those who want to travel and purchase less expensive imported products, but this trend also provides quite a human capital “pull” for talent to reside in the GCC. The Indian Rupee met another historic low against the Dollar on September 6. Expatriates from India who work and earn Dirhams can now, for example, send more money to be converted back into Indian Rupee back home than ever before.
While crashes in the Argentina Peso and Turkish Lira were initially viewed as isolated market events that would not encourage a spillover into markets, the reality is that there is a trend over contagion risks spreading into currencies throughout the developing world. The Pakistan Rupee, Indonesian Rupiah, and South African Rand are just a few of the other EM currencies to stand at either record or multi-year lows at the beginning of the month.
What I am seeing following the events with the Turkish Lira and Argentine Peso is that investor attention has turned towards attacking currencies within the developing world that belong to markets that are viewed as having structural challenges. Developing markets that are reliant on high foreign inflows, debt that is denominated into foreign currencies with a high account deficit whether through the currency account or trade balance has fallen under negative spotlight from traders.
It will require a severe round of investors taking profit on USD positions to change the trend of EM currency weakness. Both the Indonesian Rupiah and Indian Rupee would be two of the prime currencies at high risk of reaching further milestone lows in the weeks ahead.
An additional market where I would look next for opportunities is the South African Rand. Minus fears over Presidential Influence into central bank policy, the South African economy is showing many similarities to those difficulties that have plagued the Turkish Lira. Both markets have account deficits, increased inflationary pressures and the looming fears of downgrades from rating agencies.
Additional headwinds from the news that South Africa has entered economy its first technical recession since 2009 and the threat that President Trump has placed the nation on his “public watch list” as South Africa faces difficulty with highly sensitive land reform post-apartheid is only going to make the selling pressure more problematic for the Rand.
Another currency that I would keep an eye on during September is the Russian Ruble. The Ruble has been caught in the backlog of different challenges mentioned above that are consistent with the ongoing pressure for emerging markets. It also faces another difficulty with the conclusion from a recent investigation that the Russian leadership was aware of the spy attack that took place many months ago in the United Kingdom.
It is being priced into the Ruble that the United States, European Union, Canada, and the United Kingdom will place further economic sanctions on Russia. Although Russia’s economy has shown in the past that it can withstand sanctions following the many that were placed since the Crimea conflict of 2014, it will not minimize that the market risks on the Ruble are tilted towards further selling momentum.
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