The EM Crosses – ZAR, MXN & TRY
But did it ever get of the horse? Certainly not for these key emerging market currency pairs. The trend is very much set and running. The Central bank news this week has only added to the Greenback bid as policy divergence, particularly with the BoJ is cemented. Overnight the BoJ left monetary policy unchanged, but downgraded its assessment of inflation, which added to Draghi’s dovish tone at the ECB meeting yesterday and off rocked the greenback again.
So far today, the dollar has corrected some of the gains seen yesterday, led by a rebound in EURUSD and a decline-from-highs in USDJPY, with the former retreating to 1.1590-1.1600 from the 16-day low posted earlier at 1.1543 and the latter retreating back under 110.50, leaving a three-week high at 110.90. The narrow trade-weighted USD Index is presently near net unchanged at 94.78 having earlier printed a seven-month peak at 95.12. Market participants are now focusing on upcoming U.S. data releases, which today are highlighted by industrial production, consumer sentiment and the latest NY State index, which we expect will be collectively bullish for the dollar. Concerns remain on the trade front, with a CNBC report suggesting that U.S. President Trump will later announce tariffs on $50 bln worth of Chinese imports, which would mark another ratchet up in trade warring. The Washington Post has cited European officials (unnamed) speculating that the reason for the “manufactured rage,” as the editorial puts it, in Trump’s and his aide Navarro’s attack on the Canadian Prime Minister Trudeau last weekend was what poker players call a “tell,” a sign that the Trump administration is set on mounting an all-out assault on global trade organisations, and an eventual exit of the U.S. form the WTO.
The Emerging Market currencies have been particularly badly hit by the run up in the USD and the impending trade conflicts will only add to the trend. On top of that both Turkey (June 24 and July 8) and Mexico (July 1) have up coming Presidential elections which simply adds to the uncertainty. In Turkey the incumbent President Recep Tayyip Erdoganis likely to hold power but earlier this week Bloomberg reported that an opposition victory is “within the margin of error” from opinion poll returns. and that Erdogan could be forced into a run-off and he may lose its majority in parliament. In Mexico the vote appears equally close but the front runner is left-winger Andres Manuel Lopes Obrador – known as ‘AMLO’. A victory for AMLO could sink Mexico-USA relations even lower, pressure the NAFTA negotiations and further undermine the already weak Mexican Peso. In South Africa, new President Cyril Ramaphosa rules over a deeply split ruling party and faces elections next year. The split in the ruling party (ANC) has proved difficult for Ramaphosa to establish his authority and his economic agenda. When on the wrong side of the USD it can be very difficult to stem the money flows and a strong trend.
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