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Forex Emerging Markets Weekly - January 14, 2009

Wednesday, 14 January 2009 20:20:41 GMT  |  Terri Belkas, Currency Strategist

Emerging market currencies like the South African rand, Turkish lira, and Mexican peso have started 2009 off on a weak note, following a year of massive declines.

Turkish Lira, Mexican Peso Remain Under Pressure Ahead of Expected Rate Cuts, Lingering Risk Aversion

Indeed, during 2008, these currencies lost more than 20 percent as a surge in flight-to-safety in the middle of the year led to huge selloffs in risky assets. Given the fact that both the Banco de Mexico and Central Bank of the Republic of Turkey are anticipated to cut rates in the near term and with investor confidence failing to improve substantially, downside risks remain for this currencies.




Mexican Peso – There are a variety of economic indicators due to be released from Mexico over the next week or so, but the most critical by far will hit the wires on January 16. The Banco de Mexico is forecasted to cut rates for the first time since April 2006 by 50 basis points to a 7-month low of 7.75 percent. Indeed, it was only last summer when the central bank was still in the process of raising interest rates in an effort to combat inflation. While commodity prices have fallen significantly since then, the Banco de Mexico has reported that the annual measure of inflation remained at a seven-year high of 6.53 percent in December due to the weaker Mexican peso’s impact on import prices. Meanwhile, the lingering problem of risk aversion in the financial markets has continued to exert bearish pressures on the Mexican peso at the start of the year, and a rate cut by the Banco de Mexico could exacerbate the currency’s declines.

Turkish Lira – There are just a few economic indicators due to hit the wires in the near-term, including the unemployment rate and consumer confidence, both of which are likely to reflect weakening conditions. The key thing to watch though will be the Central Bank of the Republic of Turkey’s (CBRT) next rate decision, as it has the potential to be extremely market-moving. The CBRT is grappling with the same issues that many other emerging market central banks are facing: slowing growth and relatively high measures of inflation. However, CPI has started to fall and given the plunge in commodities, and inflation pressures are expected to ease further throughout 2009. As a result, there is potential for the CBRT to cut rates for the third straight month by 75 basis points to a nearly 3-year low of 14.25 percent, especially since their last rate cut didn’t yield the sharp sell-off in the Turkish lira that many feared.

South African Rand – Event risk will be limited for the South African rand through the next week as only the Investec Purchasing Managers’ Index (PMI) and Retail Sales will be released. Investec PMI, a gauge of activity in the manufacturing sector, is likely to remain 50 for the eighth straight month in December, signaling a contraction. Meanwhile, South African retail sales have the potential to fall negative for the seventh consecutive month in November, suggesting that the economy will continue to slow and adding to evidence that the South African Reserve Bank (SARB) will continue cutting interest rates.  However, with risk trends reemerging as a driver of price action throughout the financial markets, the correlation between the South African rand and commodities like gold become increasingly pertinent and worth watching.

Singapore Dollar, Hong Kong Dollar – The Singapore dollar and Hong Kong dollar haven’t moved very much since the start of the year, but this likely has less to do with fundamental factors and instead has more to do with the fact that the Monetary Authority of Singapore regulates their monetary system by manipulating the Singapore dollar in the currency markets (instead of using interest rates like the Federal Reserve), while the Hong Kong dollar has reached the lower end of its USD/HKD trading band, which is implemented by the Hong Kong Monetary Authority, of 7.75 - 7.85 and thus only has one way to go.







USD/TRY seems increasingly likely to rise toward its November highs of 1.7488, especially as market-wide risk aversion hurts demand for high-yielding currencies and ahead of an expected rate cut by the Central Bank of the Republic of Turkey. It will be important to watch for a USD/TRY break above resistance at 1.6235, as this will leave the door open for a sharp rally. On the other hand, a broad decline in the US dollar could allow USD/TRY to pull back toward rising trendline support at 1.5080/1.5100.


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

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