Despite gains for the South African ran and Mexican peso on Thursday, many emerging market currencies remain down over 15 percent since the start of the month. However, Asian EM currencies like the Singapore Dollar and Hong Kong Dollar have fared relatively better. Why?
Record Volatility Sends Mexican Peso, South African Rand, and Turkish Lira Reeling
Despite gains for the South African ran and Mexican peso on Thursday, many emerging market currencies remain down over 15 percent since the start of the month. However, Asian EM currencies like the Singapore Dollar and Hong Kong Dollar have fared relatively better. Why? The Singapore and Hong Kong Dollars are managed by their respective governments, while the other currencies are not. Indeed, the biggest trend in the markets lately has been strong risk aversion, which has sent forex carry trades, and especially emerging market currencies, spiraling lower. In fact, looking at daily charts of USD/MXN, USD/TRY, USD/ZAR, and the CBOE’s VIX Volatility Index, there is a clear correlation over the past few months.
Overall, most emerging market currencies, including those in Asia, face downside risks in the long-term as they tend to be very dependent upon exports for growth. Indeed, their biggest customers - wealthy nations - are already showing signs of slowing significantly, and this will put pressure on domestic demand in emerging market economies to drive expansion going forward.
Source: Bloomberg
Mexican Peso – While the majority of the G7 countries are in the process of or are considering cutting interest rates, the Banco de Mexico is widely expected to leave rates steady at 8.25 percent on October 17. On October 9, Banco de Mexico Deputy Governor Guillermo Guemez Garcia said that it was too early to tell if inflation is under control, as the latest CPI numbers showed that consumer prices grew 0.68 percent during September, and while the annual rate cooled to 5.47 percent from 5.57 percent, the index was still near 5-year highs. However, the Mexican economy is likely to experience some headwinds in the wake of the global economic slowdown, especially in the US. Mexican President Felipe Calderon has recognized this as he proposed a stimulus package equal to 1 percent of GDP that includes spending on infrastructure, energy and education to help the economy weather the crisis. As a result, there is some risk that the Banco de Mexico will consider cutting rates, but given the severe weakening of the Mexican peso over the past month, they may not want to give traders any reason to sell the currency off further.
Turkish Lira – The Central Bank of the Republic of Turkey (CBRT) is grappling with the same issues that most central banks are facing: slowing growth and relatively high measures of inflation. However, unlike regions like the US and UK, Turkish CPI has hit double-digit levels. While CPI has eased back over the past two months to 11.1 percent in September from 12.1 percent in July, the declines may not be significant enough to convince the CBRT to cut rates quite yet since the index is still well above their target of 7.5 percent for 2009. Furthermore, like most other emerging market currencies, the Turkish lira has fallen sharply since September and the decline would only be exacerbated by rate cuts. As a result, the CBRT will likely leave rates unchanged at 16.75 percent on October 22 and try to wait out the market turmoil in the hopes the Turkish lira will appreciate before they start to make monetary policy more accommodative.
South African Rand – There is no data scheduled for release out of South Africa, which will leave price action for the South African rand dependent upon risk trends. Indeed, increases in volatility could continue to weigh heavily on the currency.
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 CPI figures from both regions on October 23, as signs of cooling inflation pressures could lead the Asian currencies to weaken. Meanwhile, on October 24, Singapore’s industrial production figures could prove to be disappointing as slowing global growth impacts exporters.
Written by Terri Belkas, Currency Strategist of DailyFX.com E-mail: tbelkas@dailyfx.com