Forex Emerging Markets Weekly - August 21, 2008

Published August 22nd, 2008 - 07:29 GMT

The South African Rand is expected to gain as forex markets correct from the spike in US Dollar strength. Singapore Dollar trades choppy as MAS intervention is suspected. The Hong Kong Dollar continues to slide against the greenback. Turkish Lira consolidates losses, but can it break higher?

South African Rand (ZAR)

South African Rand to Gain As Forex Markets Correct From the Spike in Dollar Strength

US Dollar momentum has dominated price action in the forex markets in recent weeks, with the South African Rand pairing being no exception. August 8th saw the pair plow though resistance market by a downward-sloping trend line established in mid-June. Bullish momentum has since abated as the greenback retraces in preparation for the next upward push. With USDZAR now positioned below the 50% Fibonacci retracement of the 06/13-06/04 selloff at 7.6810, downside momentum may extend to the 38.2% level at 7.5640.

On the fundamental front, last week saw South African Gross Domestic Product beat expectations to print 4.5% in the year to the second quarter versus 4.0% expected. The improvement came as mining companies moved past the power shortages that had shut down production in January. Mining and manufacturing make up a fifth of the overall economy. The improvement may be fleeting as the effects of recent monetary tightening filters into the broad economy. The central bank raised rates six consecutive since June to beat down inflationary pressure from rising energy prices.

A busy week looms ahead, starting with July’s edition of the Consumer Price Index. The metric is expected to see headline inflation at a whopping annualized rate 13.5%, the highest since 1992. Producer Prices will print the following day, with expectations there calling for a reading at 13.7% in the year to July. On balance, the central bank is unlikely to hike rates again a the next policy meeting. Borrowing costs now stand at 12% and the bank will likely wait before issuing another increase until the dis inflationary effects of current levels can be assessed. A single rate change typically takes 2 full quarters to be fully reflected in the broad economy. Monetary policy is likely to be helped by the advancing spectre of global slowdown, with demand erosion helping to slow the economy and bring inflation back in line. While next week is likely to see unemployment to the lowest level on record at 17.4%, the reading references March and is therefore extremely backward-looking. The current employment has likely turned south already, with projections calling for growth to slow to 2.9% by the end of this year.

South Africa – Event Risk For The Week Ahead

USD/ZAR Technical Resistance/Support Levels

Written by Ilya Spivak, Currency Analyst for

Turkish Lira (TRY)

Turkish Lira Consolidates Losses – Can It Break Higher?

The Turkish Lira did little but consolidate over the course of the past week, as USD/TRY trades just below a key resistance trendline. However, there hasn’t been any sort of significant economic data on hand to ignite moves powerful enough to signal direction for the pair. On Monday, Turkish consumer confidence rose to 77.01 in July from 75.01, showing a mild improvement from the lowest reading since record keeping began in 2003. Indeed, it appears that the rejection by the Constitutional Court of a case to outlaw the governing AK party helped to sooth concerns about political instability. Consumer sentiment could continue to improve upon the next reading as well given the sharp drop in oil prices between mid-July and mid-August.

Looking ahead to next week, there will be little in the way of key indicators. Foreign tourist arrivals do not tend to be market-moving, but the release of the Turkish trade balance could be. The deficit is in danger of widening even further in July from $7.7 billion, as the country imports approximately 95 percent of the oil and natural gas it consumes. Since energy prices were still very strong for much of the survey period, the import component will likely inflate higher.

Given this event risk, there is some downside potential for the Turkish Lira (USD/TRY positive), but with key trendline resistance looming above, USD/TRY could actually ease. This may have more to do with the US dollar than anything else, as the generally overbought currency is due for a correction according to the latest forex positioning numbers.

Turkey – Event Risk For The Week Ahead

USD/TRY Technical Resistance/Support Levels

Written by Terri Belkas, Currency Analyst for

Singapore Dollar (SGD)

Singapore Trades Choppy As MAS Intervention Suspected

The USDSGD had a week of choppy trading that saw suspected intervention by the Monetary Authority of Singapore offset dollar bullish momentum. Speculation was that the MAS was trying to suppress the domestic currency as they feared export demand will fall. The country already saw domestic growth decline as retail sales fell 3.2% in June. It was the first decline in four month as demand for cars and luxury goods dropped. Consumers continue to see their purchasing power diminish as inflation continues to rise.

Rising prices has led to consumer confidence in Singapore registering its first drop after rising in every survey since its inception in 2005. The Nielsen Consumer Confidence index unsurprisingly slid 12 points to 114 from 102, as sentiment has plunged worldwide amid inflation woes, unemployment and slowdown in growth. 47% of Singaporeans surveyed believe a global recession will hit in the next 12 months. monetary authorities find themselves with the same problem as central banks across the globe, whether to focus on rising prices or slowing growth. The IMF has implored the MAS to prop up the local dollar as an attempt to ease inflationary pressures. If their recent suspected intervention is accurate then it is clear they have chosen to focus on the downside risks.

The upcoming economic calendar will provide event risk in the form of CPI and industrial production. Rising prices have been wreak havoc on domestic growth and the MAS’s lack of action to abate could lead to a significant increase in inflation. Industrial production could also weigh on the local currency as slowing demand from abroad could lead to a drop in output. However, the recent weakness in the Singapore dollar may give demand a boost.

Singapore– Event Risk For The Week Ahead

USD/SGD Technical Resistance/Support Levels

Written by John Rivera, Currency Analyst for

Hong Kong Dollar (HKD)

Hong Kong Dollar Continues Slide Against Greenback

The Hong Kong dollar strengthened throughout the week due to increasing risk aversion on the back of the Fannie Mae and Freddie Mac potential bailout. The currency also found support from a jump in inflation, lower unemployment and a rise in the composite interest rate. A GDP report that showed growth slowing in the second quarter would weigh on the Hong Kong dollar earlier in the week. After a test of 7.8160 the USDHKD was ultimately fall to 7.060 before finding support.

The economic picture for the city continues to worsen as growth contracted 1.4% in the second quarter and rose 4.2% on an annualized basis-the slowest since 3Q 2003. The global slowdown has curbed demand for Chinese exports which flow through Hong Kong ports. Companies and consumers are also battling rising inflation which grew to 6.3% as food and import prices continue to rise, feeding throughout the broader economy. Employers seeing their margins shrink and activity fall have started to cut payrolls leading to an increase in unemployment to 3.2%

The July trade report may provide some event risk for the pair if exports continue to fall. The growth outlook for the Asian region continues to deteriorate as the economies of their main trading partners slow. The main event risk for the week may come from the FOMC meeting minutes as a hawkish commentary could send the Dollar soaring.

Hong Kong – Event Risk For The Week Ahead

USD/HKD Technical Resistance/Support Levels

Written by John Rivera, Currency Analyst for

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