Market rout pushes EM FX further into the red…
…but CEEMA FX has been resilient except TRL and RUB
We have further lowered our forecasts for CEEMA & South African rand
Market rout pushes EM FX further into the red
The potent cocktail of China, emerging market and commodity fears escalated sharply on Monday. Emerging market commodity currencies and Asia FX showed substantial losses. Currencies of emerging market commodity exporters mirrored the price sell-off in commodity prices. Meanwhile, the deterioration in investor sentiment towards China weighed on Asian FX. Last week we already communicated our new Asia FX forecasts and this week we will focus on the adjustments in CEEMA FX and the South African rand.
CEEMA FX has been resilient…
Currencies of central and eastern Europe (CEE) excluding Russia have done relatively well for several reasons. The economic outlook of these economies is bright and their performance has surprised on the upside, so far. This reflects that CEE-economies are benefitting from the upswing in the eurozone, their main trade partner. But domestic demand is also strengthening, underpinned by a recovering of the labour market. In addition, these economies are energy importers and will thus benefit from the recent fall in oil prices. Going forward we expect CEE currencies to outperform the euro, because of monetary policy tightening next year. However, we have adjusted our forecasts downwards, because recent market movements have resulted in unrealistic appreciation paths.
…with the exception of the Turkish lira…
In contrast, the Turkish lira has been under heavy pressure due to heightened political uncertainty. Indeed, after the coalition talks broke down, President Erdogan has called for snap elections in November. Opinion polls suggest that the APK’s popularity has only increased marginally, making it likely that it will again not secure a majority in the coming elections. This suggests that new coalition talks will remain difficult and implies that the country is heading for a prolonged period of heightened political uncertainty. Therefore, the lira will remain under pressure in the near-term in our view.
…and the Russian rubble and South African rand
The Russian ruble and the South African rand also weakened sharply. South Africa’s economy contracted by an annualised 1.3% qoq in Q2. While growth is set to return in the second half of the year, it will remain weak on the back of commodity price weakness, high inflation preventing the central bank from loosening policy, and ongoing electrical power shutdowns due to maintenance work. It is likely that the rand will remain under pressure when the Fed starts hiking interest rates. In Russia, despite some tentative signs of stabilization, the fall in oil prices has continued to weigh on the ruble. The recovery in oil prices we expect should support the ruble.