Emerging market currencies suffer as dollar soars
In the foreign exchange market, most traders focus on the “major” currency pairs—that is, the most liquid currency pairs in the world. The market depth behind pairs such as EUR/USD, USD/JPY and GBP/USD provides stability and anchors us to broader system-heavy fundamental themes. However, these combinations can also translate into more limited price volatility and confusion when competing themes cloud the outlook. For the biggest currency crosses in emerging markets, sacrificing market depth could translate into sharply higher volatility — a liability as well as a boon. It also tends to focus on the more liquid currency of the pair (in this case the USD) and generally anchors the impact of the “risk trend”. These facts hold true for the four currency pairs I mention below, but each has some interesting nuances.
As the strongest dollar, can it be bought?
USD/HKD and USD/CNH move very differently
The first emerging market currency pair I want to highlight is the US dollar/Hong Kong dollar (USD/HKD). Hong Kong is a special administrative region of China, and USD/HKD should theoretically be influenced by movements in USD/CNH. It’s not a perfect mirror, but the influence of the world’s second-largest economy should be the currency’s rudder. In fact, the two currency pairs behaved quite differently. While USD/CNH retreated from multi-year highs above the 7.3000 mark, during which there were several phases of decline mixed with congestion, USD/HKD on the other hand fell without restraint from 7.8500 to 7.7600 nearby. When the RMB continued to hover around the 6.8000 mark, the USD/HKD has directly reversed back to the previous high. To some extent, this is a fixed trading range for USD/HKD, but it also implies that the direction of USD/CNH is not entirely dependent on the market.
USD/HKD superimposed USD/CNH (daily chart)
USD/MXN surges 2.7% in 2-day ROC
Unlike the Hong Kong dollar, the exchange rate between the Mexican peso (MXN) and the U.S. dollar is completely market-determined and unrestricted. Moreover, the “North American” character of the two currencies helps moderate the development of their trend, as the performance of larger economies is considered a key guide to the economic health of their neighbors to the south. Still, the greenback’s rise amid risk aversion and a rebound in Fed rate expectations has found a strong counterpart. In fact, the dollar’s 2-day change against the Mexican peso surged 2.7%, the most since Dec. 5 and before June 14. The move would also clear the 20-day simple moving average (SMA). From a fundamental point of view, the intensity of the risk is not serious, but there are no important events of concern in Mexico.
USD/MXN overlay 20-day SMA and difference between ROC and spot 20-day SMA (daily chart)
USD/INR challenges record highs
Another currency pair that has limited exposure to factors other than overall sentiment but which has increased speculative sensitivities across economies is USD/INR. The dollar’s gains were on full display in the pair, which posted its biggest two-day gain against the Indian rupee since Dec. 6. At the time, the dollar was rallying strongly against the Indian rupee, trying to test the all-time high reached in October. In the end, the exchange rate stayed near the 83.00 line. Will USD/INR strike yet again? We could easily get to where we were at Monday’s close. Clearly, the pullback in this currency pair has been far less than that of other risk-led indicators such as global stock indexes. If risk aversion intensifies, it may not be inconceivable to imagine a new high for USD/INR.
USD/INR superimposing 50-, 100- and 200-day SMAs (daily chart)
USD/TRY hits record high as Turkish lira plunges
Referring to historical record highs, in this past period, the US dollar/TRY once again set a new record high. You may have noticed that USD/TRY medium-term volatility (60-day ATR) has dropped significantly over the past 6 months. This is due to increased intervention by Turkish officials. But yesterday’s earthquake in Turkey and a rebound in the dollar fueled the pair’s gains. If the market is not restricted, it is difficult to determine how this currency pair will change. However, the fact that there has been no meaningful decline (either in volatility or trend) suggests that we have not yet reached the level of equilibrium that the market considers itself to be. (Written by John Kicklighter, compiled by Lisa)
USD/TRY overlaid with 50- and 100-day SMAs, 60-day ATR, spot 100-day difference (daily chart) (Source: Tradingview)
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