Emerging market currencies not in favor

Emerging market currencies not in favor. The rand has found short-term relief in recent days, although it appears to be on a weakening trajectory in the medium to long term.

While domestic catalysts, such as weak GDP, a cut in interest rates and an increase in the current account deficit have contributed to the smoothing of the local currency this year, depreciation has followed risk sentiment, which has meant that emerging market asset classes are also mostly under pressure.
The external narratives that have contributed to the movements include: declining trade opportunities as central banks in the US, Europe and the UK take a more aggressive stance on monetary policy and the tensions of the trade war that continue to threaten the state of global economic growth.

The following graph illustrates the performance of the dollar vis-à-vis the BRICS countries (Brazil, Russia, India, China and South Africa) both in the quarter and in the semester ending June 30, 2018.

The Rand

The rand’s trends against its developed market peers suggest continued weakness. The USD/ZAR, EUR/ZAR and GBP/ZAR pairs highlight these weakening trends as currencies trade above the simple moving averages of 20, 50 and 200 days (MA’s).

The USD/ZAR has found resistance at the level of R13.90/$. A break in this level is expected to unlock a new movement towards the next historical resistance level of R14.40/$.

In this breakout scenario, a close below R13.60/$ could be considered as the failure level for the move. Only if the R13.40/$ level is broken (with a close below) will we consider that the short term trend is changing direction.

The EUR/ZAR setting is similar to the USD/ZAR setting. The EUR/ZAR has found resistance at the level of R16.20/EUR. It is expected that a break of this level will unlock a new move towards the next historical resistance level considered at R16.65/EUR. In this breakthrough scenario, a close below R15.87/EUR could be considered as the failure level for the move. Only if the level of R15.60/EUR breaks (with a close below) will we consider that the short term trend is changing direction.

The price defined for the GBP/ZAR is slightly lower than that of the EUR/ZAR and USD/ZAR currency pairs, as there is clear short-term consolidation in the form of a triangle. In case of a break above the manifesto R18.30/GBP, R18.90/GBP would be the preferred resistance target in the move. In this scenario, a near triangle support below R17.95/GBP can be used as a failure level for the trade. Only if the R17.75/GBP level is broken (with a close) will we consider that the short term trend is changing direction.

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Trump fails to lower oil prices

The lack of response by US crude oil to President Donald Trump’s demand that the Organization of Petroleum Exporting Countries reduce its prices earlier this week has added to the evidence that a new upward movement is possible once the current period of consolidation is over.

However, the market response was minimal given the continuing threat of U.S. sanctions against Iran and a reported threat by Iranians to close the Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman and is an important shipping route for oil.

Why the price of crude oil in the U.S. could go even higher

Trump’s problem is that spare production capacity in the oil market is limited, and U.S. crude oil inventories remain relatively low. Data released Thursday by the US Department of Energy showed that reserves rose unexpectedly: 1.25 million barrels in the week to June 29, rather than the 3.54 million drop expected by analysts.

However, the rise was much smaller than the 9.89 million drop recorded the week before and while crude oil prices fell with the news, they soon moved away from the day’s lows. The reaction of the oil price to the latest shoots of the US-China trade war has also been limited, suggesting that the underlying strength of the market remains intact.

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