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Emerging market currencies out of favour

Jul 06 2018 15:31
Shaun Murison

Shaun Murison is a market analyst at IG. (Image supplied.)

The rand found some short-term reprieve at the beginning of July, although appears to remain on a weakening trajectory in the medium to long term.

While domestic catalysts, including weak GDP, a rate cut, and a widening current account deficit have contributed to the local currency softening this year, the deprecation has followed risk off sentiment which has seen emerging market asset classes mostly under pressure as well. External narratives that have contributed to the moves include: diminishing carry trade opportunities as the US, European and British central banks adopt a more hawkish stance on monetary policy, and trade war tensions which continue to threaten the state of global economic growth.

The below graph* illustrates the currency performances of the dollar against BRICS nations (Brazil, Russia, India, China and South Africa) for both the quarter and half-year ending 30 June 2018.

 

The rand

 The trends for the rand against its developed market peers are suggesting continued weakness to come. The USD/ZAR, EUR/ZAR and GBP/ZAR pairings highlight these weakening trends as the currencies trade above the 20, 50 and 200-day simple moving averages (MAs).

USD/ZAR

 



The USD/ZAR price has been finding resistance around the R13.90/$ level. A break of this level is expected to unlock a further move towards the next level of historical resistance considered at R14.40/$. In this breakout scenario, a close below R13.60/$ might be considered as the failure level for the move. Only if the R13.40/$ level is broken (with a close below), would we consider the short-term trend to be changing direction.

EUR/ZAR

 

The EUR/ZAR setup is similar to that of the USD/ZAR setup. The EUR/ZAR price has been finding resistance around the R16.20/EUR level. A break of this level is expected to unlock a further move towards the next level of historical resistance considered at R16.65/EUR. In this breakout scenario, a close below R15.87/EUR might be considered as the failure level for the move. Only if the R15.60/EUR level is broken (with a close below), would we consider the short-term trend to be changing direction.

GBP/ZAR

 

The GBP/ZAR price setup is slightly different to the EUR/ZAR and USD/ZAR currency pairs, in that there is a clear short-term consolidation in the form of a triangle. Should a break above the R18.30/GBP manifest, R18.90/GBP would be the favoured resistance target from the move. In this scenario a close below triangle support at R17.95/GBP may be used as the failure level for the trade. Only if the R17.75/GBP level is broken (with a close) would we consider the short-term trend to be changing direction. 

*All graph data sourced from IG.

Shaun Murison is a market analyst at IG.

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rand  |  emerging ­markets  |  currencies
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