The Turkish lira, South African rand, and Mexican peso have taken a serious beating versus the US dollar over the past three months, as the lira has tumbled 27 percent, while the rand and peso have fallen 22.5 percent. In recent days, the declines have been less severe, but with risk aversion lingering throughout the financial markets, it is far to early to say that these currencies are bound to recover.
The Turkish lira, South African rand, and Mexican peso have taken a serious beating versus the US dollar over the past three months, as the lira has tumbled 27 percent, while the rand and peso have fallen 22.5 percent. 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 - wealthier 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.
Mexican Peso – Economic indicators out of Mexico this week are generally anticipated to reflect a slowdown in growth. On November 19, Industrial Production is expected to fall to a 6-month low of -0.5 percent in September from a year earlier, compared to -1.6 percent in August. The following day, the unemployment rate for the month of October is forecasted to rise to a 4-year high of 4.28 percent, suggesting that company’s are laying off workers in response to the global economic slowdown. Finally, on November 21, Q3 GDP is likely to show that expansion slowed to the weakest pace since 2003.
Turkish Lira – There is only one key release due to be released out of Turkey this week, but it has the potential to be extremely market-moving. 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 and have failed to cool, as the annual measure remains extremely high at 11.99 percent. 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 November 19 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 Singapore’s Q3 GDP figures, though revisions to the initial readings are not expected. Meanwhile, Hong Kong’s unemployment rate is forecasted to rise to 11-month high of 3.6 percent on November 18, while CPI expected to fall to one-year low of 1.9 percent upon release on November 20.
Chart of the Week - USD/TRY: Like many of the other emerging market currencies, the Turkish lira continues to consolidate near its recent lows. Over the past week, the lira has fallen roughly 5 percent versus the US dollar, but that hardly reflects the big picture for USD/TRY given its sharp rally during September and October. Indeed, we’ve seen consistently that increases in volatility lead to spikes in USD/TRY as the US dollar has been treated as a “safe haven” asset while relatively risky emerging market currencies sell-off quickly. Currently, there’s quite a bit of near-term support below at 1.60 and while this latest consolidation could continue, it may only be a matter of time before we see a breakout. Another surge in volatility could easily send USD/TRY higher to push above trendline resistance at 1.6880 to target 1.7400. On the other hand, an increase in risk appetite could weigh the pair below 1.60 toward a rising trendline at 1.5600, though 1.4700-1.5000 may provide more formidable support.
Written by Terri Belkas, Currency Strategist of DailyFX.com E-mail: tbelkas@dailyfx.com