Emerging market currencies like the Mexican Peso, South African Rand, and Turkish Lira are down more than 3 percent this week, but Asian EM currencies like the Singapore Dollar and Hong Kong Dollar have held up. Why? Interest rates.
Mexican Peso, South African Rand, and Turkish Lira Down Over 3% This Week
Emerging market currencies like the Mexican Peso, South African Rand, and Turkish Lira are down more than 3 percent this week, but Asian EM currencies like the Singapore Dollar and Hong Kong Dollar have held up. Why? Interest rates. In recent days, we’ve seen forex carry trades get hit hard by mounting risk aversion and [historically high volatility](javascript:void(0);/1221674947499/) throughout the markets following the failure of Lehman Brothers and US bailout of AIG. This news came on the tails of the US seizure of Fannie Mae and Freddie Mac just a week ago, and signals 1) investor confidence is incredibly pessimistic and 2) government intervention does not have a lasting impact.
Looking at a breakdown of the performance of EM currencies relative to the US dollar, it is clear that the ones to take the biggest hit are the high-yielders. Indeed, the Central Bank of the Republic of Turkey maintains their Base Rate at 16.75 percent, the South African Reserve Bank has their benchmark rate at 12.00 percent, while the Banco de Mexico keeps their overnight rate at 8.25 percent.
Mexican Peso – Mexican industrial production is anticipated to edge higher to an annual rate of 0.2 percent in July from -0.5 percent upon release on September 18. This will be followed on September 19 by the Banco de Mexico’s policy meeting, and they are widely expected to leave rates unchanged at 8.25 percent. Indeed, following three rate increases during the previous three months, the central bank is likely more confident that they can keep inflation pressures in check without making monetary policy more restrictive. Meanwhile on September 22, the unemployment rate is forecasted to rise to 4.20 percent in August from 4.15 percent, but given the deterioration in the labor markets, retail sales may prove to be disappointing on September 23. Finally, bi-weekly CPI numbers on September 24 may reflect a pick-up in price pressures despite the broad decline in commodities.
Turkish Lira – The Central Bank of the Republic of Turkey (CBRT) is expected to leave rates at 16.75 percent on Spetember 18 following 150 basis points worth of hikes between May and July. Nevertheless, CBRT Governor Durmus Yilmaz is perceived as remaining hawkish, as he said on June 5 that his task was to restore credibility as has consistently exceeded the bank’s inflation target since April 2006. Meanwhile, the Turkish trade deficit could hit another record on September 23 as oil imports far outweigh the export balance.
South African Rand – Inflation data will be the theme of the week in South Africa, as CPIX is forecated to hit yet another record high of 13.4 percent in August from a year ealier. This data will be released on September 23, and will be disconcerting for the South African Reserve Bank (SARB), as this is still well-above their inflation target range of 3-6 percent. The same day, retail sales for the month of July will be released and could continue to reflect weakening domestic demand for the fifth consecutive month. On September 25, the producer price index for the month of August is anticipated to highlight rocketing inflation pressures at the factory gate, despite the drop in commodities during the survey period.
Singapore Dollar, Hong Kong Dollar – Trading of these two currencies may have more to do with price action for the US dollar, but from an event-risk perspective, both will face inflation data (CPI) for the month of August. The indexes could ease slightly due to the plunge in oil from nearly $150/bbl in July to below $100/bbl in the past few weeks. Meanwhile, Singapore’s industrial production and Hong Kong’s trade numbers could suffer amidst signs that growth in China – Hong Kong’s biggest trade partner – is slowing.
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Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: <[email protected]>