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Will the US force emerging markets FX rates lower?

With Western rates rising and USD liquidity faltering, we are seeing the emerging markets put under increasing pressure.

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US dollar
Source: Bloomberg

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. 

The respect of that trendline resistance highlights a potential for near-term downside, which will come starkly into view in the event that we see a break below the 6703 swing low from last week.

The Turkish lira has been hurt by a number of factors aside from the notable current account deficit, with investors growing increasingly fearful of the direction of the country.

While inflation continues to climb, it seems President Recep Erdogan is willing to step in and undermine the central bank when he sees it necessary. This uncertainty over the direction of the country has played into TRY bears, with USD/TRY gaining over 70% in the last three years. That clear long-term uptrend for the pair is expected to persist, with the daily chart below highlighting that the next break higher could soon be with us. The creation of lower highs and flat lining lows has been undermined today, with a rally above 46,793 resistance. Should the price hold above that level, there is a strong chance we will see the pair push higher again.

Finally, USD/RUB has been in focus of late, given the imposition of sanctions on Russia by a host of Western nations. That relationship has shown little signs of thawing, although with the World Cup providing a perfect PR boost for the country, there could be some hope that they will sway public opinion over the next month. That being said, for the most part we have a bearish trend playing out for the ruble. 

Interestingly, this a very different picture from the Turkish lira, with the dollar losing ground against the Russian currency throughout much of 2016 and 2017. However, this has started to reverse in 2018, with a more bullish picture gaining pace in recent months.The break through the 60,4339-60,9964 resistance zone particularly shaped up a more bullish picture. We have been trading in a symmetrical triangle since. However, with that previous sharp rally through the 60,4339-60,9964 resistance zone, it seems likely that the breakout from this pattern comes towards the upside.

The daily chart highlights today’s failed breakout. However, watch for a rally and hold through the 64,2962 swing high as a signal of impending upside for USD/RUB.

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