Emerging Markets Analysis: USD/ZAR, USD/MXN & USD/RUB

Over the last month, we have been bullish on the USD due to the fact that we think the Fed’s stimulus will be cut back sooner than the market expects. In terms of the most vulnerable currencies to a cut in stimulus, it’s the emerging market currencies. In this article, we will look at 3 pairs USD/ZAR, USD/MXN, and USD/RUB…

Liquidity and Emerging Markets

If the Fed cut stimulus the most vulnerable currencies are the ones that reply the most on US Funding: “The line of events is probably the following. The Fed tapering means that US Treasury issuance will again outpace QE purchases, leading to tighter financial conditions in Emerging Markets (as USD funding access tightens). This, in turn, leads to a worsening of medium-term expectations for nominal growth and inflation in developed markets, which is usually a positive USD scenario with a time-lag” (NORDEA)

The Impact of Commodity Prices and Risk On

The emerging markets are also likely to turn lower if we have a sell-off in commodity prices which at present are at a bullish extreme. In addition, financial markets which have been very risk-on in recent months with stock markets hitting new multi-year highs which is supportive of emerging markets – if we get a move to risk-off, this will accelerate the USD’s rise against the emerging market currencies but even without risk-off, the USD will firm longer-term as financial stimulus has peaked and will cut as we move forward.

Emerging market currencies are volatile but for long-term trend traders, they can very often offer good risk to reward and significant profit potential with just small positions.

Tehcnical Analysis

At present we see the USD as a long term buy on strength the daily charts are below for all 2 pairs and we have also noted longer term targets on the monthly charts if we do see a major up trend develop.

Research provided by LearnCurrencyTradingOnline.com

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