Emerging Market Currencies could be near bottom as US rate rise nears
Emerging market currencies have had a torrid time recently versus USD pummelled by plummeting commodity prices, China’s slowdown, global economic concerns and in anticipation of the turning of the US interest rate cycle.
Though there’s likely to be more downside for emerging market currencies in the short-term, they could be nearing a bottom with many forecasts for stronger global economic growth next year. For this year various forecasts peg 2015 global economic growth at around 3.1% with the prospect for 3.4% next year.
Many leading commodity markets are likely to bottom out next year following savage sell-offs this year, which will support the currencies of the countries that rely on exporting them.
An important pointer to a recovery in emerging market economies will be a pick-up world trade. In recent months it has been stagnant and well below its trend growth rate. A faster pace of economic growth should see emerging market exports pick-up again, particularly towards developed countries.
Meanwhile, markets are forecasting a 75% chance that the US Federal Reserve will raise interest rates in mid-December by 0.25% – a move that seems priced in with even flighty equity markets seemingly comfortable with this change in monetary policy.
If history is any guide, there’s a strong chance that the USD rally won’t carry on much further after the first interest rate rise, particularly as the tightening cycle is likely to be gradual and not that prolonged.
Of course there are a number of caveats for a recovery in emerging market currencies to happen.
Many have borrowed heavily in USD and there are questions over whether they’ll be able to stomach a rate rise. Another key factor is for US economic growth to remain steady and for the Eurozone not to slip back into recession. Coupled with that is China, which is trying to redirect its economy towards domestic consumption whilst managing a soft landing as it works off various credit bubbles.
Nonetheless, if the world’s leading economies can grow as forecast, then the benefits of that growth will feed through to many emerging market countries and their currencies. Also, the USD could well level out over much of 2016.
TECHNICAL ANALYSIS: USD/ZAR – Next leg of the rally?
Over the last decade USD/ZAR has been moving higher, though there was a period of reversal from October 2008 to July 2011, and the charts point to further potential gains over the coming weeks.
Over the last 12 months USD/ZAR rallies have been characterised by steady rises followed by fairly sharp pull-backs. The pair appear to be in the midst of such a pull-back, which might be in the process of turning into a renewed USD/ZAR rally.
Support is placed at 13.97, 13.89 and 13.74. If that last number is cleared then look for traders to target levels just above 13.00. Resistance can be found at 14.15 and 14.44 with the latter being a particularly significant number as it is the previous high.
One relatively reliable indicator for ‘buy’ signals this year on this pair has been the daily slow stochs, which appears to be close to issuing another buy signal. If the pair can decisively clear 14.15 along with a stochs buy signal, this could a green light to go long USD/ZAR.
On the fundamentals, South African growth remains sluggish at just 1% in Q3, partly reflecting weak commodity markets and problems with electricity generation. Growth next year is only expected to be a relatively modest 1.5% (1.4% for 2015) with both numbers lagging US growth rates. However, South Africa’s central bank raised rates for the second time this year by 0.25% last week to 6.25% to dampen inflation running at over 4%.
By Justin Pugsley, Markets Analyst, MahiFX