Emerging Markets: Profit taking in EM FX - Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that a short-term corrective rebound in the US dollar against the CEEMEAs, they have been patiently waiting may finally materialise.

Key Quotes

“The South African rand and the Turkish lira are leading losses at the beginning of the proper first week of trading this year as the USD is better bid. While the US non-farm payrolls reported at 148k in December were lower than the consensus expectation of 193k, the Fed remains on track to raise interest rates further this year. It also seems that investors may have decided to book some profits after various CEEMEA currencies have reached overbought levels against the US dollar, especially the Polish zloty and the Hungarian forint.” 

“With EUR/USD leaning lower USD/CEEs are moving in the opposite direction. The September and November lows at 3.5136 and 3.5157 respectively form an important resistance area in USD/PLN. A break higher would imply that the January low at 3.4299 is a short-term bottom. EUR/PLN is also gaining upside traction after falling to the lowest level since August 2015 last week. The pivot at around 4.178 is crucial to watch. If cleared, it would shift the short-term bias to the upside in EUR/PLN.”

“The severely battered Turkish lira is the best performing CEEMEA currency so far this year firming more than 1.3% against the US dollar. Its performance implies that at least for some opportunistic investors Turkey’s central bank has done enough by raising the late liquidity window lending rate by 50bps to 12.75% last month. However, with inflation at 12.98% y/y in November, real interest rates are not sufficiently high in our view in a global environment where several major central banks intend to gradually increase rates. Technical momentum indicators are not too far from levels that on many previous occasions implied that the pullback in USD/TRY is overdone and a corrective rebound unfolded.”

“USD/ZAR has reached oversold levels and some investors may book profits on their short positions causing a squeeze higher. There is a lot positive news regarding new ANC leader Ramaphosa priced in already. While his long-term economic plan should put South Africa on the path of sustainable and balanced growth, implementing it may prove far more difficult than initially assumed by investors. Any signals that Ramaphosa faces strong opposition within the ANC to implement unpopular structural reforms would likely trigger a squeeze in USD/ZAR.”

“Last, but not least, USD/RUB should be trading close to the 2015 low at 48.1365 based on the historic correlation with oil prices.”

“For the ruble to gain a bullish momentum versus the US dollar we may have to wait until after presidential election on March 18. Around 51% of Russians prefer economic reforms over stability, up from 39% in 2016 and 30% in 2012-2014, a poll by ISRAS revealed. For the first time since 2003 those who are in favour of reforms represent the majority. This could indicate a major shift in Russians’ priorities and an important signal for President Putin who may focus on reforms once re-elected. A strong push for structural reforms would be an encouraging signal for foreign investors and for the ruble.”