(from my colleague Dr. Win Thin)
Is EM FX finally turning? We have been surprised (and puzzled) by how well EM currencies have held up as DM rates have risen. Recent price action suggests we may at an inflection point for EM FX. We note too that similar patterns are being seen in the major currencies as well.
The rand may be the so-called "canary in a coal mine" for EM and needs to be watched closely. The rand has been the second worst performer (-3% vs. USD) in H2 after being amongst the top performers (+5% vs. USD) in H1.
We focus on ZAR because we think it has been one of the biggest beneficiaries of the quest for yield by investors. ZAR has always been one of our least favorite EM currencies. South Africa comes with terrible fundamentals, as well as heightened political risk and downgrade risk. Though the high yields have attracted hot money flows, the SARB is now cutting rates. This will ultimately weigh on the rand’s attractiveness.
USD/ZAR bottomed around 12.86 on July 27 and has since moved higher. This bottom was a week after the SARB surprised markets by starting the easing cycle. After an initial rally following the rate cut, the rand steadily weakened. The SARB is likely to continue cutting rates at the September 21 and November 23 meetings, further eroding the interest rate differentials with DM.
Looking elsewhere, it appears that the dollar has bottomed against several other EM currencies. Many are bumping up against some key levels. Failure to break through could see some renewed selling pressures. Below, we identify some possible bottoms for the key EM currencies as well as retracement objectives from the July-August EM rally.
Latin America
Brazil: USD/BRL couldn’t break below 3.11 and has turned higher. The low for this move was recorded on August 1. Using the July drop, retracement objectives come in near 3.1930 (38%), 3.2190 (50%), and 3.2455 (62%). The 200-day MA comes in near 3.2150.
Chile: USD/CLP couldn’t break below 645 and has turned higher. The low for this move was recorded on July 27. Using the July drop, retracement objectives come in near 654 (38%), 656.50 (50%), and 659.25 (62%). The 200-day MA comes in near 661.
Colombia: USD/COP couldn’t break below 2950 and has turned higher. The low for this move was recorded on August 3. Using the July-August drop, retracement objectives come in near 3007 (38%), 3025 (50%), and 3044 (62%). The 200-day MA comes in near 2968.
Mexico: USD/MXN couldn’t break below 17.45 and has turned higher. The low for this move was recorded on July 19. Using the July drop, retracement objectives come in near 17.93 (50%) and 18.04 (62%). The 200-day MA comes in near 19.4160.
Peru: USD/PEN couldn’t break below 3.2350 and has turned higher. The low for this move was recorded on August 3. Using the July-August drop, retracement objectives come in near 3.2485 (38%), 3.2525 (50%), and 3.2570 (62%). The 200-day MA comes in near 3.30.
EMEA
Czech Republic: EUR/CZK couldn’t sustain a break below 26 and has turned higher. The low for this move was recorded on August 3. Using the May-August drop, the major retracement objectives come in near 26.21 (38%), 26.31 (50%), and 26.41 (62%). The 200-day MA comes in near 26.75.
Hungary: EUR/HUF couldn’t break below 303 and has turned higher. The low for this move was recorded on August 1. Using the July-August drop, the major retracement objectives come in near 305.50 (38%), 306.25 (50%), and 307 (62%). The 200-day MA comes in near 309.30.
Poland: EUR/PLN couldn’t break below 4.20 and has turned higher. The low for this move was recorded on July 18. Using the March-May drop, the major retracement objectives come in near 4.2565 (50%) and 4.2800 (62%). The 200-day MA comes in near 4.2965.
Israel: USD/ILS couldn’t sustain a break below 3.50 and has turned higher. The low for this move was recorded on June 30. The pair is on track to test the April high near 3.6855. Using the January-June drop, the major retracement objectives come in near 3.6345 (38%), 3.6810 (50%), and 3.7275 (62%). The 200-day MA comes in near 3.6865.
Russia: USD/RUB couldn’t sustain a break below 56 and has turned higher. The low for this move was recorded on April 25. Using the November-April drop, the major retracement objectives come in near 61.30 (50%) and 62.60 (62%). The 200-day MA comes in near 59.40.
South Africa: USD/ZAR couldn’t sustain a break below 13 and has turned higher. The low for this move was recorded on June 14. The pair is on track to test the July 11 high near 13.63. Using the April-June drop, the last major retracement objective near 13.4245 (62%) now sets up test of the April 10 high near 13.96. The 200-day MA comes in near 13.36.
Turkey: USD/TRY couldn’t sustain a break below 3.52 and has turned higher. The low for this move was recorded on August 1. Using the July-August drop, the major retracement objectives come in near 3.5635 (38%), 3.5800 (50%), and 3.5955 (62%). The 200-day MA comes in near 3.57.
Asia
China: USD/CNY couldn’t sustain a break below 6.72 and has turned higher. The low for this move was recorded on August 1. Using the July-August drop, the major retracement objectives come in near 6.7500 (38%), 6.7610 (50%), and 6.7720 (62%). The 200-day MA comes in near 6.8560.
Hong Kong: The USD/HKD peg at 7.80 will remain in place for the foreseeable future, as will the 7.75-7.85 trading band. Still, the pair has drifted higher to trade near 7.82, its highest level since January 2016. The high that month came in near 7.83.
India: USD/INR broke below 64 after the RBI rate cut but there has been very little follow-through so far. The low for this move was recorded on August 3. Using the July-August drop, the major retracement objectives come in near 64.08 (38%), 64.24 (50%), and 64.40 (62%). The 200-day MA comes in near 66.05.
Indonesia: USD/IDR couldn’t sustain a break below 13300 and has turned higher. The low for this move was recorded on July 19. Using the July drop, the major retracement objectives come in near 13341 (38%), 13356 (50%), and 13371 (62%). The 200-day MA comes in near 13335.
Korea: USD/KRW couldn’t break below 1110 and has turned higher. The low for this cycle was recorded on July 27. Using the July drop, the major retracement objectives come in near 1129 (38%), 1134 (50%), and 1140 (62%). The 200-day MA comes in near 1148.
Malaysia: USD/MYR couldn’t break below 4.25 and has turned higher. The low for this cycle was recorded on June 15. Using the May-June drop, the major retracement objectives come in near 4.29 (38%), 4.3015 (50%), and 4.3135 (62%). The 200-day MA comes in near 4.3665.
Philippines: USD/PHP couldn’t sustain a break below 49.50 and has turned higher to trade at levels not seen since 2006. The pair is now trading at the highest level since September 2006. Clean break of the 50.26 area would set up a test of the July 2005 high near 56.45. The June 2006 high near 53.65 is an intermediate target. The 200-day MA comes in near 49.66.
Singapore: USD/SGD couldn’t break below 1.3550 and has turned higher. The low for this move was recorded on July 27. Using the July drop, the major retracement objectives come in near 1.3665 (38%), 1.3700 (50%), and 1.3740 (62%). The 200-day MA comes in near 1.4040.
Taiwan: USD/TWD couldn’t break below 30 and has turned higher. The low for this move was recorded on July 27. Using the July drop, the major retracement objectives come in near 30.32 (38%), 30.38 (50%), and 30.44 (62%). The 200-day MA comes in near 30.91.
Thailand: USD/THB couldn’t break below 33.20 and has turned higher. The low for this move was recorded on August 4. Using the July-August drop, the major retracement objectives come in near 33.60 (38%), 33.72 (50%), and 33.84 (62%). The 200-day MA comes in near 34.77.