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Peso, Rand and Lira out of favour as US rate rise looms

 

South African Rand expected to weaken further in 2015

The South African rand has been steadily weakening against the US dollar since the second half of 2011 as economic growth has fallen below the African average after the 2008 recession. The rand has fallen to around 12.5 rand per dollar in June, its weakest level this year. Despite a rebound in mining output in the first quarter of 2015, the South African economy has been plagued by power shortages, which has impacted manufacturing output. The agriculture sector also fell in the first quarter and unemployment jumped to a 10-year high of 26.4%.  Rising inflationary pressures have meant that the South African Reserve Bank could soon raise its key repo rate, further dampening growth.  Weaknesses in other emerging market economies have not helped the rand either, with the uncertainty with Greece in particular making emerging currencies riskier. A rate rise in the US could also deter capital flows into emerging markets later in the year and a slowdown in the Chinese economy will likely lead to lower demand for South African mineral commodities.

 

Mexican Peso hits new lows but strong fundamentals make it more attractive than other emerging markets

The Mexican peso has not been immune to falling oil prices given that the oil industry comprises around 13% of Mexico’s exports. The economy has been hurt further by government austerity measures amounting to spending cuts of 1.5% of GDP as government income suffers from lower oil prices. The weakening outlook has pushed the peso to new lows against the dollar this year, prompting the central bank to announce daily dollar sales of $52 million, which has now been extended until September. But as the US moves closer to a rate rise and oil prices recover only modestly, the peso is expected to hit new lows in the coming months. Having fallen by 16% already against the dollar this year, the peso touched a new low of 15.7693 on June 5. Analysts expect for the central bank to take stronger measures to support the peso if the declines continue in the months ahead. Despite the negative outlook though, no major sell-off is expected for peso-denominated bonds. Mexico has stronger fundamentals than other emerging economies with structural reforms underway and low inflation and unemployment.  There are also signs that manufacturing exports to its largest trading partner, the US, are improving as the US economy strengthens.

 

Turkish election outcome adds to lira rout

Sunday’s election results in Turkey where the ruling AK party lost its majority in government pushed the Turkish lira to fresh lows against the US dollar. The lira plummeted from around 2.65 liras per dollar before the polls to a low of 2.80 on Monday, but managed to recover to 2.75 on Tuesday. Apart from the political uncertainty resulting from a coalition or minority government, a weaker economy also weighs on the lira, as well as general dollar bullishness. Turkish economic growth has been flagging since 2012 and inflation has ticked upwards to above 8%, reducing the scope for interest rate cuts. Unemployment has risen to above 11% since the start of the year and exports have been flat since 2012. The country continues to rely heavily on foreign capital inflows to fund its large current account deficit, making the lira vulnerable to sudden drop in investor confidence. However, economic reforms from the government’s earlier terms in office have raised Turkey’s GDP per head to one of the highest in emerging markets. Whoever’s in government next will need to put further reforms back on the agenda if Turkey’s not to jeopardize its recent economic achievements.



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