FxWirePro: Beware of EMFX turbulence and snippets of BRICS FX universe

The turbulence in the Emerging Markets currencies remains the dominant subject for the FX market. The volatility of the Emerging Market currencies is close to the highs recorded after the global financial crisis (refer above chart). And so far, no improvement is in sight. The next currency is being dragged into the downward spiral in the shape of the Indonesian rupiah. 

However, the depreciation of the currencies alone does not constitute a crisis. We are still hoping that the turbulences will remain limited to a few countries due to the stability orientated monetary policy of countries such as South Africa, Brazil, Russia and India. 

However, the risk is that the central banks will end up in a situation like the frog that does not realise it is being boiled in water that is slowly getting warmer. Only a decisive approach of the central banks can calm sentiment on a sustainable basis. Until we see that happening the uncertainty will remain high. 

RUB: Although the ruble hardly reacted to yesterday's development in the UK, the developments could prove significant from the point of view of triggering additional sanctions. The UK government announced findings from the Salisbury investigation, with names and pictures claiming to show that Russian intelligence operatives with the blessings of the Russian state were behind the poisoning. The Russian administration, of course, refutes such allegations, but that is beside the point. The findings have the potential to trigger additional sanctions because the US has anyway imposed a first round of sanctions for this act, and warned that the second round would be far more draconian. Russia could avoid this second round by opening itself up to foreign investigations and meeting a list of demands – but no one really expects Russia to oblige in this specific way. Hence, the prospect of a second round of sanctions appears strong – and the publication of findings from the UK may well act as the timing trigger. Brace for greater ruble volatility. 

Trade tips: 06-Sep-18 USDRUB 1x1 put
spread (61.00/59.00), spot reference: 69.116 levels (0.92%).

ZAR: The South African economy contracted for the second consecutive quarter, a development that came as a surprise. That means that technically the country is in recession. In Q2 overall economic output on a seasonally adjusted basis recorded a 0.2% fall. 

Moreover, the previous quarter’s result was adjusted to the downside to now -0.7% qoq. That means that the economy has grown by only 0.4% compared with the same period last year. Decisive for the weak result was the agricultural sector once again. 

In view of the weak first half of the year we will adjust our growth outlook for South Africa for 2018 and 2019 to the downside. In view of several EM crisis areas the rand is under depreciation pressure as a result of contagion risks. The weak data yesterday has further fuelled these concerns. However, we assume that the credibility of the stability orientated central bank, who already signalled its willingness to act, will mean that rand depreciation will be limited. 

Trade tips: 06-Dec-18 USDZAR call options (14.50) were advocated in our previous post at spot reference: 15.1168 levels, we currently maintain the same strategy at 14.3160levels. 

CNY: The Ministry of Commerce (MOC) reiterated its preparedness to retaliate against any new tariffs from the US administration. It added that “any attempts to pressure China are unreasonable and futile. The trade war will not solve any problems. Equal and sincere dialogue and negotiations are the only correct ways to solve China-U.S. trade disputes”. The two-month public consultation period of another USD200bn of tariffs on Chinese goods ends at mid-night 6-September in the US. PBOC fixed the mid-point of its trading band just slightly lower today at 6.8212 and spot USDCNY is holding steady around 6.8360. August FX reserves due today are likely to hold steady around USD3.12trn but the focus is squarely on a potential US announcement. Courtesy: Commerzbank