At last weekend’s G20 meeting of finance ministers and central bankers in Buenos Aires, their final communique noted “heightened trade and geopolitical tensions”, which include “rising financial vulnerabilities, inequality and structurally weak growth, particularly in some advanced economies”. Thank you, I’m sure we’re all well aware of that, and we didn’t have to ferry all you lot around the globe to be told.
In this column last week we assessed the trends in key commodities that are already subject to tariffs. This week we thought we’d look at some emerging market currencies – the ones normally known as the Brics (Brazil, Russia, India and China) – and try to see how they might react against the US dollar. The thinking here was triggered by President Trump’s break with protocol in criticising the US Federal Reserve. Last week in a CNBC TV interview he said: “I’m not thrilled [with interest rate rises], because we go up and every time you go up they want to raise rates again. I am not happy about it. But at the same time, I’m letting them do what they feel is best.’’
The greenback has gained against nearly all internationally traded currencies this year, the pace picking up considerably in April. Leading the pack in terms of currency devaluation is the Turkish lira, off 26 per cent this year. In second place is the Brazilian real, which has lost 16 per cent as investors fret over a wide-open presidential election in October. As is so often the case, moves here are asymmetrical, with devaluations a lot faster than revaluations. We expect it to consolidate under the psychological 4 level over the summer, and then move on up to its record 4.25 set in September 2015. Interestingly, we saw something similar in 2002 ahead of President Lula’s win, the country’s first elected left-wing leader.
The Russian rouble, a currency that not that many people trade actively, was exceptionally stable in 2017, holding between 56 and 60 roubles per US dollar. That changed abruptly in the second quarter of 2018 as it burst to 65 and subsequently consolidated in what’s known as a pennant chart formation. We see this as the start of a new trend to a weaker Russian unit, which has a measured target at 71 roubles, probably by the year-end.
The Indian rupee is what’s known as a ‘managed’ currency, the central bank doing its best to keep it stable against a background of persistent inflation (over 10 per cent per year in 2013, drifting to 5 per cent in June this year). Today it’s at its weakest ever, at just over 69 rupees per dollar. The trouble is that it’s held in a large right-angled triangle since 2013 and a monthly close above 69 would kick off the next phase of devaluation. An initial measured target lies at 75 rupees, with a second leg up to 79 very likely if momentum builds.
China’s yuan we covered recently elsewhere, so instead we’ll scrutinise the South African rand (country code ZA). It had been strengthening since 2016, but the tide has turned this year, from needing 11.5 rand to buy a dollar to 14 now. We feel there’s another stage due this year, with a sustained break above 14.5 setting off a rally for the dollar to 16 – and we won’t rule out 2016’s record high at 17.8.
