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Forex Emerging Markets Weekly - October 1, 2008

Wednesday, 01 October 2008 16:45:48 GMT  |  Terri Belkas, Currency Strategist

Emerging market currencies like the Mexican Peso, South African Rand, and Turkish Lira have been hit hard this week. Why? Interest rates.

Turkish Lira, South African Rand Plummet On Carry Trade Sell-offs, Watch for SARB Rate Decision

Emerging market currencies like the Mexican Peso, South African Rand, and Turkish Lira have been hit hard this week, but Asian EM currencies like the Singapore Dollar and Hong Kong Dollar have held up. Why? Interest rates. In recent days, we’ve seen forex carry trades get hit hard by mounting risk aversion and historically high volatility throughout the markets following news that the US House of Representatives voted down the US Treasury’s $300 billion bailout bill. 

Looking at a breakdown of the performance of EM currencies relative to the US dollar, it is clear that the ones to take the biggest hit are the high-yielders. Indeed, the Central Bank of the Republic of Turkey maintains their Base Rate at 16.75 percent, the South African Reserve Bank has their benchmark rate at 12.00 percent, while the Banco de Mexico keeps their overnight rate at 8.25 percent.

Mexican Peso – Mexico faces a wide variety of event risk through October 10. On October 3, consumer confidence is forecasted to edge back to a reading of 89 in September from 89.6 amidst widespread concerns of a global economic slowdown that could hurt the export-dependent Mexican economy as well. On October 6, measures of manufacturing and non-manufacturing sector business activity are both likely to reflect weaker conditions. On October 9, both headline and core CPI figures are anticipated to reflect a pick up in price growth during the month of September, while annualized rates should cool slightly. There is some downside risk for these reports given the sharp pullback in commodity prices over the past few months. Finally, the October 10 release of the trade balance for August is unlikely to see significant revisions from the initial reading of -2243M, and as a result the data shouldn’t be too market-moving for the Mexican Peso.

Turkish Lira – Like Mexico, there will be quite a bit of data released over the next week or so. On October 3, manufacturing PMI for the month of September is likely to remain below 50, signaling contracting business activity. Later in the day, measures of consumer and producer price growth for the month of September are both anticipated to accelerate. While the annualized indexes are expected to fall slightly lower, this is unlikely to calm the fears of the Central Bank of the Republic of Turkey (CBRT) as CPI still remains well above their 2009 target of 7.5 percent. On October 8, there are downside risks for the industrial production reading for the month of August, as manufacturing PMI for the same period reflected slowing output. Likewise, capacity utilization for September may slide from 76.2 percent, as it has done for the past 3 months.

South African Rand – South African data released in coming days shouldn’t be too market-moving for the Rand, with only Naamsa vehicle sales and central bank reserves scheduled to hit the wires on October 2 and October 7, respectively. On October 8, manufacturing production numbers could show a slight improvement, providing a boost to the South African Rand. On October 9, South African Reserve Bank (SARB) is generally expected to leave rates at 12 percent, as August inflation reports showed that CPIX rose more than expected to a record high of 13.6 percent, which is well-above their inflation target range of 3-6 percent. Even more disconcerting was the jump in core CPI, which also hit a record high of 14.3 percent. The key to trading this rate announcement will be to gauge the SARB’s bias in subsequent commentary, especially since they are likely to take a far more cautious stance going forward given the drop in commodity prices and instability in the world’s financial markets.

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. From Singapore, the Purchasing Managers’ Index could edge higher while advanced Q3 GDP results are likely to reflect a broad slowing. From Hong Kong, waning domestic demand may result in a softer retail sales figure, while foreign currency reserves should remain robust.





Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com

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