Be Careful of Emerging Market Currencies

As the risk of inflation in the USA backs off it is clear that the Federal Reserve will be in no hurry to raise interest rates and drive up the dollar. Emerging market currencies had their best quarter this decade on the news. But all good things must come to an end. Bloomberg writes to beware the rally in emerging market currencies.

Beware the rally in emerging-market currencies: the best quarterly performance in almost seven years is about to reverse.

“We don’t see continued appreciation through the rest of the year,” said Nicholas Bennenbroek, head of currency strategy at the U.S. bank in New York. “Federal Reserve interest-rate increases should continue at a steady pace, which should weigh on most foreign currencies, including Asian currencies.”

In other words US interest rates will not go up fast but they will go up. And tensions on the Korean peninsula will not be good for North Korea, Japan or China. What other specifics tell us to be careful of emerging market currencies?

Australia Losing Buyers in China

The slowing Chinese economy is taking a toll on Australia, a major supplier of coal, iron ore and other commodities. Pound Sterling Live says the AUD is increasingly fragile.

“The Aussie Dollar’s long-term technical forecast was in danger of being upset last week but the pair’s recent tumble back to support has revived the bear’s hopes for a major downtrend taking hold. What’s more, the broader argument for ongoing losses is looking stronger than ever,” says Matthew Ashley, a FX Research Analyst for Blackwell Global.

Ashley says AUD/USD could be exposed to further weakness should the neckline of the overarching chart pattern be broken over coming days, even in the absence of a major fundamental shift in sentiment.

Their analysis is based on technical factors but the fundamentals dictate that higher US interest rates and slower business activity in Australia will hurt the AUD.

Not So Bad for India

A bright spot in emerging markets is India. says the IMF sees faster growth for the Indian economy.

International Monetary Fund (IMF) maintained India’s growth forecast at 7.2% in FY18, saying the growth path is on-track with medium-term prospect favorable.

India’s economy is expected to growth faster than the slowing economy of China this year and substantially faster than that of the EU or USA. The rupee will likely prosper as well.

Russia, Annexations, the Ruble and Sanctions

At the middle of 2014 35 rubles got you a dollar. Then the price of oil fell, Russia annexed Crimea and Russian backed separatists took over a corner of Eastern Ukraine. The USA and EU responded with economic sanctions. By early 2016 it took 75 rubles to buy a dollar. The ruble has steadily strengthened since then and now the ruble trades 55 to the dollar. Nevertheless, Russian adventurism continues in Syria, Ukraine and elsewhere and despite the election of Putin-loving Donald Trump to the US presidency it is unlikely that sanctions on Russia will soon give way. Bloomberg notes that Russia is consolidating control of Ukraine’s rebel zones.

Vladimir Putin is seizing on mixed signals from the U.S. to quietly tighten Russia’s grip on two rebel regions of Ukraine, burying hopes for a European-brokered peace deal and relief from sanctions anytime soon.

While the Kremlin continues to publicly back the accord that Germany and France oversaw in 2015, Putin’s real strategy in Ukraine is to fully separate the two border areas known as the Donbas through incremental integration with Russia, three people close to the leadership in Moscow said. He has no plans to recognize or annex the territories, they said.

While these actions may play well in Russia as nationalistic they will not help relieve sanctions or help the ruble. Thus the Russian currency is another to be careful of in the emerging markets.