Turkish Lira Hits 5-Month High As CBRT Hikes Rates To 16.75%

Emerging Markets Weekly - Turkish Lira hits 5-month high as CBRT hikes rates to 16.75%, Mexican Peso rises to fresh 6-year high, South African Rand brushes off weak retail sales to rally with gold, Hong Kong Dollar derailed by weakening consumer consumption, Singapore Dollar ignores data, tests 30-year high.

[B]South African Rand (ZAR)

South African Rand Brushes Off Weak Retail Sales, Rallies With Gold[/B]

The South African rand gained steadily versus the US dollar over the course of the week, despite the fact that the sole economic release for the nation reflected deteriorating conditions. Indeed, the source of the currency’s gain stemmed from a rise in gold, with which the South African rand holds a solid correlation. The metal hit a three-and-a-half month high of $989.60/oz on Wednesday, but went on to pull back toward $960/oz during trading on Thursday.

Taking a look at South Africa’s economic news, retail sales fell for the third consecutive month in May at an annual rate of 3.6 percent. Spending had only been anticipated to drop 1.3 percent during that period, but it appears that higher interest rates and record gasoline prices are taking a toll on the average consumer.

Meanwhile, though it did not get much press, StatsSA announced that it would change the weights used to calculate the CPIX basket in order to better reflect spending patterns. While these will not be introduced and used for making monetary policy decisions until January 2009, the core measure (excluding food and energy) that is used for public sector wage deals, is anticipated to see a greater increase. As a result, the South African Reserve Bank is anticipated to maintain their hawkish bias, despite weaker consumption, as CPIX is already weill above the 3-6 percent target range at 10.9 percent.

Looking ahead to next week, there is absolutely no economic data scheduled for release. As a result, USD/ZAR may be more prone to trading based on broad US dollar price action, or could follow the whims of gold prices. It is worth noting looming support from a rising trendline at 7.500, which could stem any sharp drops in USD/ZAR.

South Africa – Event Risk For The Week Ahead

*No data is scheduled to be released this week.

USD/ZAR Technical Resistance/Support Levels

[I]Written by Terri Belkas, Currency Analyst for DailyFX.com
E-mail: <[email protected]>

[B]Mexican Peso (MXN)

Mexican Peso Hits Fresh 6-Year Highs on Interest Rate Expectations, Oil Rallies[/B]

The Mexican peso shot to fresh 6-year highs against the US dollar, as a growing interest rate differential and a short-term rebound in key risky asset classes offset the effects of dramatic sell-offs in crude oil futures. Indeed, crude oil now trades an incredible 12.5 percent off of record-highs in just a week of price action. The Mexican Peso’s resilience to such downward pressures clearly emphasize that dynamics have changed for the typically oil-correlated currency. Markets are instead paying close attention to relative risk-adjusted returns, and the historically slow-moving USDMXN pair offers an attractive interest rate return for comparatively little risk of capital losses. A cursory look at implied volatilities across currency pairs ranks the Mexican Peso as the second-lowest of the world’s 16 foremost liquidly traded pairs.

Markets now clearly expect that the Banco de Mexico will raise interest rates on Friday to 8.00 percent, with 20 of 27 analysts polled by Bloomberg news forecasting a 25bp hike. That would leave the differential between US and Mexican overnight yields at an impressive 600 basis points—an attractive proposition from a returns standpoint. Given such dynamics, we could see the Peso continue to remain strong against the low-yielding Greenback and see little reason for substantive retracements through the near term. Technically, the next significant support level for the pair comes in at 10.08 - a full 1500 points from current market levels at 10.23.

Mexico – Event Risk For The Week Ahead

USD/MXN Technical Resistance/Support Levels

[I]Written by David Rodríguez, Currency Analyst for DailyFX.com
E-mail: <[email protected]>

[/I][B]Turkish Lira (TRY)

Turkish Lira Hits 5-Month High As CBRT Hikes Rates To 16.75%[/B]

The Turkish lira rocketed to a 5-month high versus the US dollar on Thursday as the Central Bank of the Republic of Turkey (CBRT) hiked rates by 50 basis points to 16.75 percent, marking the third consecutive meeting that the Bank raised rates. Indeed, consumer prices have grown so rapidly that the CBRT dropped their formal inflation target of 4 percent and they now simply seek to bring the annual CPI rate of 10.6 percent in June down to 7.5 percent in 2009. The rate increase was in line with expectations, and the minutes from the meeting will be released within eight working days.

Taking a look at the CBRT’s policy statement, the Monetary Policy Committee noted that supply and demand conditions were generally in line with the predictions contained in their April Inflation Report. Given tight global credit markets, the CBRT judged that “aggregate demand conditions support disinflation,” but warned that large increases in electricity rates “will lead to a significant but temporary rise” in July’s CPI figures.

While the CBRT may not increase rates at their next meeting, the Bank has maintained their hawkish bias and will likely hike again later in the year, as the Committee said they will “consider a further measured rate hike when needed,” but that the timing depended on “developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.”

Looking ahead to next week, the Turkish lira faces minimal event risk as only tourist arrival figures will be released. This is not a particularly market-moving report, and as a result, USD/TRY may trade based more on US dollar price action. Furthermore, USD/TRY ran into a significant support level on Thursday following the lira’s rally. As a result, the pair may simply consolidate above the 76.4 percent fib of 1.1479 – 1.3474 at 1.1950 in coming days.

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]>

[B]Singapore Dollar (SGD)

Singapore Dollar Ignores Data, Tests 30-year High [/B]

USDSGD ignored disappointing economic data, with Singapore dollar testing 30-year highs (USDSGD lows) near the 1.35 level. Retail Sales grew 4.8% in the year to May versus 6.2% expected and 7.5% in the preceding month. The metric got a lift in April as by booming commodity prices produced hefty growth in supermarket and gasoline sales. Inflation expectations seem to have bled into consumer sentiment in May. High oil prices can boost retail sales if consumers retain their normal consumption patterns in the face of rising costs, but will depress sales if demand falls on expectations that buoyant prices have become entrenched. With the price level now at the highest since 1982, the change in spending behavior seems reasonable.

As we suggested, Non-oil and Electronics export readings saw decline, printing at -10.5% and -14.6% in the year to June, respectively. Prints to the downside were to be expected following last week’s release of June Purchasing Manager’s Index readings. That data revealed a decline in overseas orders amid the spreading global slowdown. Shipments to the European Union fell 16.1% while those to the US fell 24.3%. The EU is Singapore’s largest export market, with the US at a close second.

Looking ahead, next week will see June’s Consumer Price Index flash across the ticker. As mentioned above, inflation now stands at the highest level since 1982. Commodities prices remained firm in June, so CPI is likely to continue higher. Economists’ expectations call for a 0.5% increase since last month for an annualized reading at 8.0%. Easing global demand is likely to weigh on Industrial Production much the same as it did on export metrics. Singapore depends on Europe and the US demand for their high-end pharmaceutical and electronics goods, and the protracted slowdown in both markets is already clearly evident. May’s reading saw a sharp drop of -12.8% with more of the same likely this time around.

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]>

[B]Hong Kong Dollar (HKD)

Hong Kong Dollar Derailed By Weakening Consumer Consumption[/B]

The Honk Kong dollar’s regained momentum on broad based dollar weakness and risk aversion. The USDHKD fell back below the peg as the concerns over the Fannie Mae and Freddie Mac potential insolvency and the collapse of IndyMac would see the pair fall from a high of 7.8042 to a low of 7.7956. Dollar bulls would end the slide on the back of a better than expected earnings report that helped ease concerns over the banking sector. A strong labor report and an increase in the composite interest rate would lead to the Hong Kong Dollar regaining a bid tone, but failed to generate significant bullish sentiment.

Hong Kong unemployment remained at a decade low 3.3% which should remain supportive of consumer consuption and domestic growth. MAenwhile, the composite interest rate, which measures interbank rates, saw a slight uptick to 0.85% from 0.75%. The increase wasn’t more significant as the expectations for a rate hike in the U.S. has decreased significantly with the remergence of troubles in the banking sector. Indeed, the take over by bank regulator’s of IndyMAc, was the biggest bank fauliure in two decades and sparked concern that several smaller banks will follow suit.

Looking ahead to next week, the CPI-composite index is expected to show inflation rising to 5.8% on higher food prices. The bullish inflation data is may be offset by a bearish trade report, as exports are expected to have slowed to 9.5% from 10.3% in May on declining U.S. orders. Although, growth from China has offset U.S. weakness, but as the emerging market giant’s economy starts to cool Hong Kong growth may stall. The ultimate influence over the pair should be the prevailing risk and dollar sentiment in the market as investors try to assess the depth of the remaining fallout from the subprime crisis.

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]>

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