Higher beta EM currencies to trade with weak bias

Market participants were given a painful, if instructive, lesson in the importance of general conditions with USD-ZAR yesterday. Risk sentiment improved during the morning session due to the prospect of increasing Chinese fiscal stimulus. Consequently higher yielders in EM outperformed and USD-ZAR moved towards 13.54, some distance from levels around 14.00 seen earlier in the week. 

"In truth, this is nothing more than a relief rally. If the Chinese engage in further fiscal stimulus this is unlikely to re-inflate the commodity bubble or re-kindle the commodity super cycle. As the penny dropped with investors during the day, USD-ZAR traded higher once more towards 13.75", says Commerzbank. 

The bottom line is that a paradigm shift is seen for emerging markets where the old combination of buoyant external commodity demand and domestic credit booms will no longer manifest. As a result, higher beta emerging market currencies are expected to trade with a weak bias. ZAR will not be immune in this respect.