EM FX: Another turbulent week for CEEMEAs? – Rabobank

A cautious approach prevails at the start of a new week of trading ahead of major risk events that may set the tone for the CEEMEA currencies, according to Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“On Wednesday market participants will be waiting for the Fed to provide fresh clues about the pace of tightening.”

“While a 25bps hike is widely expected, far more important will be whether the Fed opts to revise its median estimate (the so-called dot plot) from three to four hikes in 2018. It is probably too early to anticipate the dot plot to envisage a steeper trajectory of interest rates due to persistently low inflation. That said, recent optimistic comments about the US economy from some members of the FOMC should be reflected in their projections for the federal funds rate.”

“Essentially, the median should still show three moves in 2018, but various estimates provided by policy makers may indicate a shift to a more hawkish bias compared to December.”

“The CEEMEA currencies are likely to struggle to regain their bullish momentum against the US dollar if the 25bps hike on Wednesday is accompanied by a more hawkish tone from the Fed. As high yielding currencies that rely on volatile capital inflows to finance their current account deficit the Turkish lira and the South African rand are particularly vulnerable to the prospect of faster policy normalisation by the Fed.”

“Before we hear from US policy makers led by newly appointed Chairman Powell, the markets will be hoping for constructive comments from G20 finance ministers who will gather in Brazil. The 2- day meeting is set to be dominated by the recently implemented US tariffs on imported steel and aluminium and the rising risk of full trade wars.”

“Given that market concerns about trade wars have escalated, a strong push back from G20 finance ministers against protectionist policies would be an encouraging signal for the CEEMEA currencies.”