As we roll into a new week, it still feels like the only topic of conversation is last week’s stellar NFP report. As we noted on Friday, the jobs report exceeded even the most optimistic of expectations, with 321k new jobs created in the world’s largest economy. Even more importantly, the average hourly earnings measure rose 0.4% m/m, its highest rate since August 2011!
If (and it’s a big “if”) last week’s acceleration in earnings is maintained, it could prompt the Federal Reserve to hike interest rates in the first half of next year, creating a clear monetary policy divergence between a tightening Fed and the generally accomodative stance of the other global central banks. While this could be an important theme to watch for developed market currencies heading into next year, it is by far the most important theme for emerging FX in our view.
As we go to press, EM FX is getting taken to the woodshed against the greenback. The selling has been relatively indiscrimate, with traders “selling first and asking questions later” on everything from the basket case Russian ruble to the previously solid Mexican peso. Below, we focus in on the key levels to watch on a few of this week’s most interesting EM FX pairs.
USD/ZAR: New 2.5-Year High at 11.50
After pulling back to support at its bullish trend line and 100-day MA last week, USD/ZAR has been in full-on rally mode for the five days. This move has been driven primarily by dollar strength, but with a plethora of key data releases from South Africa this week, the rand may be the primary driver of volatility moving forward; USD/ZAR traders can look forward to Mining and Manufacturing Production data (tomorrow), Retail Sales and CPI (Wednesday), as well as Employment, PPI, and Consumer Confidence (Thursday).
As of writing, the pair has blasted through previous resistance to a new 12.5-year high at 11.40, opening the door for further gains as we head into the end of the year. Looking to the chart, there is little in the way of resistance until the 78.6% Fibonacci retracement of the ’01-’04 drop near 12.00, so rates may continue to rally into the upper-11.00s moving forward.
Source: FOREX.com
USD/MXN: Rally Goes Parabolic
After lulling traders to sleep by consolidating around 13.00 for most of the year, USD/MXN has gone parabolic over the last two weeks. Beyond the pervasive dollar strength, the latest catalyst was Friday’s Banxico meeting, where the central bank noted that the balance of risks to the economy had worsened. In particular, the central bank cited weak consumption growth and a “sustained depreciation” in the peso as near-term risks. On a technical basis, USD/MXN is now at a 2.5-year high in the lower 14.00s. From here, bulls may look to target the 5.5-year highs and longer-term 78.6% Fibonacci retracement in the 14.60-70 zone.
Source: FOREX.com
USD/TRY: Bullish Triangle Breakout May Expose 2.30 Next
In many ways, the Turkish lira is similar to the South African rand: Both countries are members of the so-called “Fragile Five” due to their high current account deficits and both currencies were at the epicenter of the mini-EM FX panic seen earlier this year. It is thus not surprising that the charts of USD/TRY and USD/ZAR are similar. After finding support at its 100-day MA two weeks ago, USD/TRY has surged higher to break above a multi-month symmetrical triangle pattern at 2.26. Assuming this breakout is maintained today, it would expose the previous highs at 2.28 and 2.30 later this week.
Source: FOREX.com
No matter which way you slice it, the EM FX is getting taken out to the woodshed, and the theme of dollar strength could easily stretch into the first quarter of 2015.