EM Rundown: Fragile Five Revived?

Back in late January of this year, the so-called “Fragile Five” emerging markets (Brazil, Turkey, South Africa, India, and Indonesia) came under fire as traders sold their currencies in a mini-EM contagion. These currencies were specifically hard hit due to their current account deficits, which leaves them dependent upon foreign investment to fund their economies. Thankfully, bold actions by the Central Bank of the Republic of Turkey (CBRT) and South African Central Bank (SARB) were able to restore the market’s confidence and prevent a full-out EM panic.

Flashing forward to today, there are once again signs that traders are growing uneasy about the Fragile Five. Earlier today, the Brazilian real dropped over 1% against the US dollar to its lowest level in nearly six years on Fed tightening fears and a poll that showed incumbent President Dilma Rousseff was likely to get re-elected next month (her opponent, Marina Silva, is seen as more market friendly). Meanwhile, both the Indian rupee and Indonesian rupiah have edged lower in recent weeks, while the greenback is within striking distance of a multi-year high against both the South African rand and Turkish lira.

From a fundamental perspective, these moves are not surprising: The Fed is likely to complete its taper program next month, cutting off a key source of global liquidity that these countries have relied on to fund their deficits. Below, we examine the USDTRY and USDZAR in depth:

USDTRY: Big Technical Breakout, Busy Data Calendar

Last week, we discussed why 2.2450 was a critical level of technical resistance for USDTRY, concluding that, “if this week’s [CBRT] meeting can push the pair above 2.2450 resistance, further gains will be favored in the medium-term” (see "EM Rundown: Two Key Central Bank Meetings on Tap" for more). As it turns out, the CBRT’s decision to leave interest rates unchanged last week drove USDTRY through the 2.2450 barrier to a new 7-month high. From here, bulls may look to target the 78.6% Fibonacci retracement near 2.3190.

Fundamentally, there are some key data releases to watch this week, including foreign trade data tomorrow and inflation data on Friday. Perhaps even more critically, the ratings agency Fitch will review Turkey’s sovereign credit rating on Friday as well; with the country already rated at just BBB-, the lowest rating about the crucial “investment-grade” threshold, a downgrade could force selling from institutions that are legally mandated to invest in only investment grade debt.

Source: FOREX.com

USDZAR: January Highs in Sight?

Nearly 4,000 miles (7300 km) to the south, South Africa’s currency is also sliding against the US dollar. Since breaking out above 10.80 resistance, the pair has rallied 5,000 pips to a peak of 11.30 earlier today (see "EM Rundown: TRYing to Divine the CBRT’s Next Move" for more on the importance of the 10.80 level). The pair has a plethora of secondary economic reports scheduled for this week, and based on their interaction with this week’s high-impact US data, rates could make a run at January’s six-year highs around 11.40 later this week. As long as the MACD continues to show bullish momentum, counter-trend dips are likely to remain limited to psychological support at 11.00.