Thursday 20 September 2018


Optimism that moves from both the Central Bank of the Republic of Turkey and Central Bank of Russia to raise respective interest rates late last week should provide investors with inspiration to invest in emerging markets is wearing thin at the beginning of the week.

A number of emerging market currencies have dipped lower against the Greenback early today, as a number of different external uncertainties around the global economy contribute to investor reluctance towards purchasing emerging market currencies at their current levels.

Due to the unpredictable nature of external uncertainties around matters like trade tensions, it is difficult to buy into the headlines that we have approached a turning point for the emerging markets. External uncertainties remain intense and until there are consistent indications that these are being removed from the atmosphere, it is more likely than not that investors will prefer to adopt a guarded approach towards the currencies that belong to emerging market assets.

The Indian Rupee is a prime example of a currency that is repeatedly facing pressure from uncertain external headwinds. The Rupee is also the most notable headline mover at the beginning of the week, weakening over 1% at time of writing to edge close to its recent historic lows against the Dollar. The pressure on the Rupee has come in spite of authorities taking several measures to prevent the currency from further weakness, but the unpredictable nature of various external headwinds that are weakening investor sentiment towards the emerging markets generally is preventing the Rupee from a period of recovery.

There is no disputing that one of the main contributors to the uncertain external environment is mixed messages when it comes to the status of trade talks between the United States and China. Conflicting reports remained a theme over the weekend when indications circulated that on one hand President Trump has provided the green light for additional Chinese tariffs being met, with other reports that Beijing was considering rejecting the offer from Washington to resume trade talks.

This ultimately suggests to investors that we are no closer to an “exit” door when it comes to prolonged trade uncertainty. As such, it wouldn’t be a major surprise if investors remain “risk off” as trading for the week gets underway.

One emerging market currency that is in line for volatility throughout the upcoming week is the South African Rand. Not only will the Rand remain sensitive to the various external uncertainties that are providing headwinds to emerging market assets, but there is some quiet speculation that the monetary policy meeting later this week could result in a change of interest rate policy in South Africa.

The South African Reserve Bank (SARB) is truly situated in a very unenvious position. The Rand is a leading contender for being sensitive to external headwinds away from South Africa, but the news that the economy has entered its first recession since 2009 provides an indicator that the SARB should consider lowering interest rates. The problem is that if the SARB does lower interest rates later this week, that it will increase inflationary risks for South Africa.

The British Pound is another currency that will be exposed to volatility throughout the upcoming week. UK Prime Minister Theresa May is set for another round of key Brexit discussions throughout the week and the Pound has shown on various occasions in the past couple of weeks that it remains highly sensitive to Brexit headlines. If concerns mount that the United Kingdom is heading towards a hard Brexit, we shouldn’t be surprised if the GBPUSD once again falls below 1.30 this week.

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