OANDA Updated Q2 FX Quarterly Outlook: A patient period is upon us

Emerging Markets

Emerging currencies provided some of the more tradeable scenarios last quarter as global growth fears supported a stronger US dollar and regional events provided some short-term trends.  The overall outlook for emerging markets is heavily focused on a potential domino effect of global growth to stem from a US-China trade deal.  If the global outlook deteriorates, EM could be fall into the danger zone.

The South African rand caught a break at the end of the quarter when Moody’s decided to punt their review that could have erased South Africa’s last investment grade status rating.  The rand has been hampered by South African state-run utility Eskom’s financial woes.  The troubled utility company will likely need more aid, but that will be difficult to achieve as political divisions continue to prevent reform.  Until the rolling blackouts go away, the South African economy will struggle.

President Erdogan has helped make the Turkish lira one of the more volatile currencies.  Last month, the restrictive measures put in place before the local elections saw swap rates surge over 1,000%.  The long-term effects of preventing investors from hedging their positions will make many investors lose faith in Turkish markets.

Turkey’s central bank (CBRT) continues to try to bring down inflation from the recent 15-year highs and they are expected to switch to an easing bias in the near future.  If we do see an outright strong move higher with EM, the lira may underperform.

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