Emerging market currencies have been under pressure of late, with rising interest rates putting pressure on those markets as funds flow back into the US and Europe. This week sees a whole host of central banks take centre stage once again, with the Federal Reserve (Fed) today, European Central Bank (ECB) on Thursday, and Bank of Japan (BoJ) on Friday all providing their latest monetary policy decisions.
What with the traditionally dovish ECB chief economist Peter Praet setting out a case for the committee to lay out the pathway to the end of ECB quantitative easing (QE), we are clearly in a transition towards a more hawkish phase in Western monetary policy. However, part of the Western impact on emerging markets is also related to the US fiscal expansion which is drawing funds back into the US, sucking liquidity and capital flows from developing nations. In particular, markets have been looking down on economies whose sizeable current account deficit means that they are highly reliant upon international sources of finance. Two of the biggest developing nations with sizeable current account deficits are India and Turkey.
The Indian rupee has been declining against the dollar throughout the beginning of 2018, bringing the price back into trendline resistance. This has coincided with the widening in the USD denominating Indian current account deficit. This is showing little sign of slowing down, and with the tightening availability of US dollar, the impact may not be over yet. Given that the price has traded into trendline resistance, we are looking for a break and sustained price action above the 6889 mark.