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FxWirePro: Spotlight on BRICS FX space – Episode 2

INR: USDINR hit all-time high above 70.8 levels yesterday. The question is whether this is due to contagion from Turkey or whether the twin deficit concerns are resurfacing yet again, particularly amidst the backdrop of ongoing Fed rate hikes. 

The answer is both as we saw USDINR gap up on Monday on the Turkey news and then punched above the 70 after the wider than expected July trade deficit report. The trade deficit jumped to a near 5-year high of USD18bn due to a 29% surge in imports. This was on the back of firm oil prices which continued to inflate the oil import bill as well as a 41% surge in gold imports due to lower gold prices and restocking demand from traders. 

Given expectations of a normal monsoon this year which should support rural income, this may keep gold demand firm in coming months. As such, the overall current account deficit for the current fiscal year 2018-2019 is likely to be higher than expected at around 2.5-3% vs 1.9% for the previous year. 

The fiscal deficit for the current fiscal year is expected to hold steady around 3.3% of GDP. A quick glance at Asian currencies shows that the twin deficit currencies have fared the worst so far this year vs USD. These include the Indian rupee (INR) which has fallen by 9%, Indonesia’s rupiah (IDR) down 7.2%, and the Philippines peso (PHP) down 6.6% compared to the average drop for Asian currencies of -4.3%. In an environment of ongoing Fed rate hikes, it appears the twin deficit currencies in Asia are likely to remain the underperformers. 

Trade tips: Buy USDINR futures contracts in the range of 70.50-70.60 levels for August delivery for further upside targets. 

ZAR: In addition to the contagion risks emanating from the lira crisis there were other factors putting pressure on the rand yesterday. The warning of a rating agency that the consolidation of public households in South Africa would probably take longer than planned due to weaker than expected growth caused depreciation pressure. 

However, the rating agency still expects South Africa to reach the medium-term consolidation targets and anticipates that national debt will stabilise at 56% of GDP. 

Further pressure for the rand was created by an interview with a leading ANC member that provided first details on the expropriation of land without compensation, which the ANC had decided on in December. The controversial issue that would require a change of the constitution has since caused high uncertainty amongst landowners and investors. Recent information suggests that landownership will be reduced to 12,000 hectares. Estates exceeding that size will be confiscated without compensation and redistributed to (experienced and successful) black farmers. Disappointing retail sales added to that mix. 

Moreover, central bank governor Lesetja Kganyago had sounded concerned about the weak growth that was not sufficient to reduce the high levels of unemployment in a significant manner. Everything all told this is no news, but in times of risk-off sentiment the focus is on the risks for the South African economy and that is putting pressure on the rand. 

Trade tips: At spot reference: 14.8580 levels, (1%) in the money call options of 2m tenors are advocated with a view of arresting further bullish risks. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is displaying shy above -33 levels (bearish), while articulating (at 12:52 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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