Best analysis

With the market-implied odds of a Federal Reserve rate hike in December skyrocketing from around 30% a few weeks ago up to 68% as of writing, it’s not surprising that the US dollar has been strengthening across the board. EM FX traders will remember during past scares of Federal Reserve tightening (notably the “Taper Tantrum” in 2013 and the “Rate Hike Hissy Fit” – my term that never caught on – in March of this year), emerging market currencies were hit especially hard, but this time around the selling pressure has been less consistent.

Certain EM currencies, including the Singapore dollar, South African rand, and Turkish lira (despite the seemingly lira-positive results from Turkey’s recent election) have been hit relatively hard over the last week. On the other hand, currencies like the Mexican peso and Russian ruble have been holding relatively steady despite the market’s evolving Fed expectations.

The accepted “wisdom” is that a tightening cycle by the Federal Reserve inevitably leads to outflows from emerging markets, hurting their currencies and markets, and certainly throughout the ‘80s and ‘90s, this adage held true. However, during the two most recent examples of Fed rate hike cycles (beginning in 1999 and 2004), emerging market currencies held up relatively well until global equity markets collapsed. This shift is primarily due to more floating exchange rates in the emerging world and (if you can believe) generally lower levels of aggregate debt relative to GDP.

Therefore, bears may want to key in on currencies with fixed exchange rates (especially in the Middle East, given the sustained weakness in oil prices) and the currencies of economies with large current account deficits as the most vulnerable to a potential Fed rate hike. Not surprisingly, currencies in this category include the aforementioned Turkish lira and the South African rand.

Technical view: USD/ZAR

Speaking of the rand, USD.ZAR has rallied to a new all-time high near 14.30 as of writing. In addition to fears about the Federal Reserve raising rates, South Africa’s currency is also suffering as a result of its correlation with gold prices, which have had a rough couple of weeks.

With the exchange rate at an all-time high, there is nothing but blue skies above for USD/ZAR in our view. The only potential resistance levels to watch will be the 127.2% and 161.8% Fibonacci retracements at 14.47 and 14.86, respectively. Meanwhile, the bias will remain definitively higher as long as USD/ZAR holds above previous-resistance-turned-support at 14.15.

image004

This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE

EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE

EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action. 

EUR/USD News

GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday

GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday

GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance. 

GBP/USD News

Gold price sits at all-time highs above $2,230, US PCE eyed

Gold price sits at all-time highs above $2,230, US PCE eyed

Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited. 

Gold News

Jito price could hit $6 as JTO coils up inside this bullish pattern

Jito price could hit $6 as JTO coils up inside this bullish pattern

Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.

Read more

Key events in developed markets next week

Key events in developed markets next week

Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.

Read more

Majors

Cryptocurrencies

Signatures