This week marks the start of our weekly coverage of some key emerging market currencies, including the South African Rand (ZAR), Mexican Peso (MXN), Turkish Lira (TRY), Singapore Dollar (SGD), and the Hong Kong Dollar (HKD). This report has something for everyone, as technical traders will find support/resistance levels and price charts, while fundamental traders will enjoy our economic coverage and outlook for the week ahead.
South African Rand (ZAR)
South African Rand Struggles As Manufacturing Output Slows
The South African Rand has struggled to hold onto its recent gains over the past week data out of the manufacturing sector proved to be disappointing. In fact, output growth slowed more than expected to a 0.7 percent annual pace from upwardly revised 10.2 percent annual rate in April. However, the surge seen in the April reading of this index was likely a one-off event as there were additional working days during that period given the fact that Easter fell in March. Looking at a breakdown of the report, the manufacturing index was weighed down by glass and non-metallic mineral product output (-0.8 percent ) along with furniture and other manufacturing production (-8.9 percent). Indeed, this drop in the furniture and other manufacturing component signals a deterioration in consumer demand, which has taken a hit on the back of tighter domestic credit conditions.
Moreover, manufacturing output makes up approxiimately 16 percent of South African GDP, and as a result, a slowdown in the sector will concerning to some members of the South African Reserve Bank’s Monetary Policy Committee. Nevertheless, with CPIX, which excludes mortgage costs, accelerating rapidly to a 10.9 percent annual pace in May, the SARB is highly unlikely to consider stopping their rate hike cycle on a slowdown in manufacturing production alone. In fact, this CPIX figure is well above the South African Reserve Bank’s inflation target range of 3 – 6 percent, which raises the risks that the central bank will continue raising interest rates throughout the end of the year.
Looking ahead to next week, event risk will be light for the South African Rand, as only Retail Sales will be released. All the same, this piece of news could be market-moving for the currency, especially since the index could fall negative for the third consecutive month, suggesting that restrictive credit conditions are taking a hefty toll on the retail sector. Traders should also keep an eye on gold prices, as movements in the commodity tend to show a strong correlation with the Rand.
South Africa – Event Risk For The Week Ahead
USD/ZAR Technical Resistance/Support Levels
Written by Terri Belkas, Currency Analyst for DailyFX.com
E-mail: <[email protected]>
Mexican Peso (MXN)
Mexican Peso Trades Higher on Interest Rate Expectations, Oil Rallies
The Mexican Peso continued to trade higher against the US dollar, as improved domestic interest rate expectations and consistent rallies in oil prices support further losses in the USDMXN. Indeed, the currency pair was able to push off of formidable trendline and moving average resistance and has now rallied for the sixth consecutive day of trade. A recent Mexican Consumer Price Index report showed that domestic inflation climbed further above Banco de Mexico’s stated target range, and a continued destabilization in prices may force the central bank to continue hiking interest rates through the year ahead. According to a survey conducted by Bloomberg News, 9 of 11 analysts polled expect Banxico to raise its Tasa de Fondeo (TdF) by at least 25 basis points at its July, 18 meeting. In fact, two respondents predict that the bank will hike by a sizeable 50 basis points—underlining aggressive forecasts for the future of MXN yields.
All in all, there seems to be relatively little in the way of further Peso appreciation. Despite continued drops in global equity indices and other key risky asset classes, the MXN has remained bid and almost impervious to flare-ups in risk aversion. Much the same can be said for other high-yielding currencies, and the broader forex carry trade has clearly outperformed major stock markets.Whether or not the MXN and other high-yielders can continue to defy equity market volatility will be one of the key questions rolling forward—especially as it seems difficult financial market conditions will persist through the foreseeable future. Look for the USDMXN to challenge recent multi-year lows before any realistic hope of a turnaround. Given clear price congestion above the 10.26 mark, it will be critical to watch whether the USDMXN can sustain a break.
Mexico – Event Risk For The Week Ahead
USD/MXN Technical Resistance/Support Levels
Written by David Rodríguez, Currency Analyst for DailyFX.com
E-mail: <[email protected]>
Turkish Lira (TRY)
Turkish Lira Edges Higher Ahead of Expected CBRT Rate Hike Next Week
The Turkish Lira rose slightly against the US dollar over the course of the week, despite broadly Lira-bearish data, to allow USDTRY to continue consolidating between the 100 and 200 SMAs. Industrial production in Turkey slowed to a 2.4 percent annual pace in May – the smallest rise this year – from 6.3 percent in April. While export production has held up well, domestic demand continues to wane amidst a plunge in consumer confidence, rocketing consumer prices, and aggressive rate hikes by the Central Bank of the Republic of Turkey (CBRT).
A recent CBRT survey may come as some relief to the central bank, as the report on inflation expectations showed a bit of stabilization in early-July. Expectations for year-end edged slightly higher to 10.7 percent from 10.6 percent, but one-year expectations eased to 8.6 percent from 8.7 percent while 24-month expectations improved to 7.27 percent from 7.31 percent.
Looking ahead to next week, the Turkish Lira faces event risk as the unemployment rate and consumer confidence are both scheduled to be released. There are no consensus estimates for these reports, but further deterioration in these numbers could weigh on the Turkish Lira early in the week and allow USDTRY to hold above near-term support at 1.2154/2205. However, the slowing in inflation expectations is unlikely to change the CBRT’s hawkish bias, as they are widely expected to raise rates by another 50bps to 16.75 percent. Indeed, consumer prices have grown so rapidly that the CBRT dropped their formal inflation target of 4 percent in January, and they now simply seek to bring the annual CPI rate of 10.6 percent in June down to 7.5 percent in 2009. However, given indications of an economic slowdown in Turkey, there may be a few cautious members on the Monetary Policy Committee that will vote in favor of a less aggressive 25bp hike to 16.50 percent. Regardless, the news is likely to be bullish for the Turkish Lira and could ultimately lead USDTRY to break down toward 1.20.
Turkey – Event Risk For The Week Ahead
USD/TRY Technical Resistance/Support Levels
Written by Terri Belkas, Currency Analyst for DailyFX.com
E-mail: <[email protected]>
Singapore Dollar (SGD)
Mixed Data Sees Singapore Dollar Locked in a Range
Economic data proved to yield mixed results last week. June’s Purchasing Managers Index (PMI) surprised to the upside, swinging back into positive territory to print at 50.6 versus expectations of 48.7 and the preceding month’s 49.0. The bulk of the improvement was driven by better prospects in the Electronics sector. Indeed, the index covering that industry alone ticked up even further into expansionary territory posting a reading of 51.7 in June versus 49.4 in May. Electronics make up 30% of manufacturing, with growth in domestic demand behind the positive surprise. Overseas orders declined amid spreading global slowdown.
The positive tone failed to carry over into the preliminary estimates of Gross Domestic Product: the economy is expected to slow substantially, expanding at an annualized rate of just 1.9% in the second quarter versus 6.9% in the first. Economists were expecting a shallower decline, with growth registering at 3.2%. Conflicting data saw USDSGD remain range-bound last week, oscillating in a neatly defined range between 1.3655 and 1.3562.
Next week, things will start off with May’s Retail Sales report. Traders are likely to see continued expansion after April returned 7.5% annualized growth. The strong headline figure owed to hefty growth in supermarket and gasoline sales driven by booming commodity prices. With global oil and food prices showing continued strength in May, Retail Sales will likely offer more of the same this time around. As alluded to by this the latest June PMI releases, non-oil and electronics export readings will see decline. Emerging markets are facing a dual threat with growth waning in their major export markets all the while inflation spikes from both global input prices and strengthening domestic demand.
Singapore– Event Risk For The Week Ahead
USD/SGD Technical Resistance/Support Levels
Written by Ilya Spivak, Currency Analyst for DailyFX.com
E-mail: <[email protected]>
Hong Kong Dollar (HKD)
Hong Kong Dollar Derailed By Weakening Consumer Consumption
The Honk Kong dollar’s momentum was derailed by a weaker than expected May retail sales report. The 12.9 percent print was below economists expectations of 17 percent and down from April’s gain of 18.6 percent. Following the consumer consumption report USDHKD would briefly test 100 Day SMA support level at 7.7940 before spiking above the 7.8 peg for the first time since June 29. Despite the recent increase in risk aversion price action has consolidated as a drop in oil prices and comments from Federal Reserve Chairman Ben Bernanke that the Fed will extend the emergency lending facility for investment banks, has provided dollar support.
Retail sales in Hong Kong grew at the slowest pace in a year as rising food and fuel costs erode consumer’s purchasing power. Indeed, food sales slowed to 14.3 percent from 18.9 percent the month prior. The reduction in discretionary income led to sharp decreases in clothing and motor vehicle purchases which slowed to 8.0 percent from 18.3 percent and to 7.4 percent from 21.3 percent respectively. Additionally, a shortened Chinese Holiday saw a reduction in tourism which has fuled recent growth. The accelerated pace of inflation which rose to 5.7 percent in May compared to the 2 percent pace in 2007 and the decline in consumer confidence on the back of a slumping stock market and U.S. slowdown may depress consumption going forward.
Looking ahead to next week, the release of June’s employment report will give insight into future levels of consumer consumption. A decade low unemployment rate has supported domestic growth. However, if the headwinds from the U.S. and the credit crunch dim the outlook for Honk Kong companies, they may start to reduce expenses by cutting salaries. Additionally, the composite interest rate for June will be released, which may end a streak of five consecutive months of declines as inflation concerns have raised expectations of tightening in the U.S.
Hong Kong – Event Risk For The Week Ahead
USD/HKD Technical Resistance/Support Levels
Written by John Rivera, Currency Analyst for DailyFX.com
E-mail: <[email protected]>