Forex trading – rand on the bounce as buck retreats

Emerging market currencies roared higher in the week to June 10th, with the rand leading the charge despite South African GDP contracting. Investors are paring bets the Federal Reserve is about to raise rates again when it meets on June 15th, spurring a rally for EM currencies and stocks.


Fed Expectations

 

Key to the EM bounce is the US Fed and expectations the central bank will not raise rates in June. After making some hawkish noises in April through May, policymakers have dialled down the rhetoric after puny non-farm payrolls numbers highlighted the ongoing risks to the economic outlook. Brexit clouds are also a factor as the UK’s referendum takes place barely a week after the next Fed meeting.

Following the jobs report, the rand rallied to around the 14.7 handle versus the dollar, having been at 15.6. Despite some firming in the greenback over June 9th and 10th, the rand remains close to its best level in a month.

The Brazilian real, Colombian Peso, Russian rouble, Indonesian rupiah, South Korea’s won and Polish zloty have all notched up solid gains since the weak jobs report from the US on June 3rd.

Dead Cat Bounce?

 

EM currencies dived at the start of the year as global markets sank and oil hit multi-year lows. The revival in crude prices in March and April mirrored EM forex but May saw these currencies slump again.

Fed watchers see virtually no chance the bank will raise rates in June, but another round could come in July as long as financial markets remain steady. Many observers think markets are underestimating the Fed’s willingness to hike and it wouldn’t take much hawkish jawboning to rock the EM boat again.

Rand Troubles

 

Meanwhile there are weak fundamentals for the rand. South Africa’s economy shrank by 1.2% in the first quarter as it heads for its worst year of growth since 2009. Fitch maintained the country’s credit rating at just one notch above junk status, but warned it could cut it if the economy doesn’t pick up. Fitch and other ratings agencies are also worried about political interference.

The South Africa Reserve Bank has warned of “more diffuse sources of weakness” for the nation’s ailing economy, after a series of strikes, electricity outages and drought compounded ongoing weakness in commodities.

“Over the forecast period, growth is expected to be low despite a highly competitive exchange rate, significant public borrowing and a low real policy rate,” said the central bank in its April monetary policy review.

Meanwhile, the World Bank has slashed its 2016 growth forecast to 0.6% from 0.8%.