Binance users can store crypto on their cards and pay at Mastercard merchants.
Argentina has one of the world’s highest inflation rates at 64%.
Dollar-pegged stablecoins are in high demand in the country.
On August 4, Binance announced a partnership with Mastercard (MA) to launch the ‘Binance Card’ in economically embattled Argentina.
The prepaid card aims to bridge the gap between cryptocurrencies and everyday purchases, according to the announcement. It added that Argentina was the first Latin American (LATAM) country to get the product.
Binance Card is still in a beta phase, but it is the firm’s latest effort to boost cryptocurrency adoption and digital payments.
The card issued by Credencial Payments will allow new and existing Binance users in the country with a valid national ID to make purchases and pay bills with cryptocurrencies. More than 90 million physical and online Mastercard merchants across the globe will accept the card.
Crypto stored on the card will be converted to fiat in real-time, which is then sent to the merchant. Additionally, cardholders can earn as much as 8% in crypto cashback on eligible purchases and get zero fees on ATM withdrawals. Transactions and payments can be viewed and managed on the Binance website and mobile app.
Executive Vice President of Products and Innovation at Mastercard Latin America, Walter Pimenta, said that the firm’s “work with digital currencies builds on our strong foundation to enable choice and peace of mind when people shop and pay.”
Maximiliano Hinz, general director of Binance in Latin America, added, “Payments is one of the first and most obvious use cases for crypto, yet adoption has a lot of room to grow.”
The move comes at a time when Argentinians are suffering a cost of living crisis due to epic inflation. The country has one of the highest inflation rates in the world at a whopping 64% for June, according to Trading Economics. It is expected to reach 90% by the end of the year.
Many people have already turned to holding dollar-pegged stablecoins such as Tether (USDT) and Circle’s USDC to hedge against a rapidly devaluing Peso. Since the same time last year, the Peso has lost more than a third of its value against the greenback. As a result, there is a premium for stablecoins on Argentine exchanges due to the demand.
Argentina’s President has just sworn in the third new economy minister in a month. Sergio Massa has pledged to stop printing money that helps fuel runaway inflation.
Crypto Markets Consolidate
Crypto markets have remained flat over the past 24 hours, with a marginal dip in total capitalization to $1.1 trillion. Around $50 billion has left the space since their weekend and seven-week high.
Binance’s BNB token has reacted well to the news bucking the daily downtrend with a gain of 2.5% on the day, pushing prices above $300 again. BNB has weathered the crypto storm a little better than its brethren since it has ‘only’ lost 55% since its May 2021 all-time high.
Crude Petroleum ($46B), petroleum gas ($7.78B), scrap vessels ($2.26B), flexible metal tubing ($2.1B), and cocoa beans ($715M)
Peruvian nuevo sol (PEN)
Copper ore ($12.2B), gold ($6.76B), refined petroleum ($2.21B), zinc ore ($1.65B), and refined copper ($1.62B), animal meal and pellets ($1.54B), lead ore ($1.01B), fish oil ($434M), and buckwheat ($139M)
Russian ruble (RUB)
Crude petroleum ($123B), refined petroleum ($66.2B), petroleum gas ($26.3B), coal briquettes ($17.6B), wheat ($8.14B), semi-finished iron ($6.99B), coal tar oil ($4.49B), raw nickel ($4.03B), and nitrogenous fertilizers ($3.05B)
South African rand (ZAR)
Gold ($16.8B), platinum ($9.62B), cars ($7.61B), iron ore ($6.73B), and coal briquettes ($5.05B), manganese ore ($3.16B), chromium ore ($1.92B), titanium ore ($583M), and niobium, tantalum, vanadium, and zirconium ore ($480M)
Swiss franc (CHF)
Gold ($59B), packaged medicaments ($46.2B), blood, antisera, vaccines, toxins, and cultures ($32.9B), base metal watches ($13.6B), jewellery ($10.9B), precious metal watches ($7.32B), and hydrazine or hydroxylamine derivatives ($501M)
US dollar (USD)
Refined petroleum ($84.9B), crude petroleum ($61.9B), cars ($56.9B), integrated circuits ($41.4B), vehicle parts ($41.2B), medical instruments ($29.5B), gas turbines ($28.1B), aircraft parts ($16.3B), and orthopedic appliances ($12.1B)
Vietnamese dong (VND)
Broadcasting equipment ($42.3B), telephones ($18.2B), integrated circuits ($15.5B), textile footwear ($10.6B), and leather footwear ($6.43B), coconuts, Brazil nuts, and cashews ($3.16B), fuel wood ($2.05B), cement ($1.39B), metal-clad products ($1.37B), and cinnamon ($175M)
West African CFA franc (XOF)
Gold ($11.66B), cocoa beans ($3.84B), refined petroleum ($2.64B), rubber ($1.08B), raw cotton ($1.04B), and crude petroleum ($941M), cocoa paste ($795M), other oily seeds ($407M), Phosphoric Acid ($346M), coconuts, Brazil nuts, and cashews ($280M), ground nuts ($192M), zinc ore ($173M), raw zinc ($155M), electricity ($141M), cocoa shells ($115M), calcium phosphates ($95.7M), radioactive chemicals ($59.6M), rough wood ($59.5M), raw copper ($49.4M), Petroleum Gas ($42.5M), non-fillet frozen fish ($356.1M), other vegetable residues ($25.4M), and aluminium ore ($3.17M)
(Bold: products which the country/economic area was the world’s biggest exporter in 2019)
For active trading purposes, the ones highlighted in yellow would be characterised as freely floating and more liquid currencies. Thus, they would also be more accessible and less costly (with lower fees) to trade.
For hedging purposes, the others would present some advantages to the commercialisation of their associated natural resources, even though they would rather be considered more exotic currencies.
Here is a representation of some key commodity currencies presented in the above table on a weekly timeframe against the US dollar (reference currency):
Each chart was represented within 2-standard deviation Bollinger Bands based on a 20-period simple moving average (in orange), a 50-period simple moving average (blue curve), a 200-period simple moving average (the black curve) and in the pane below is a 14-period relative strength index (in blue) to which was applied a 9-period simple moving average (red curve).
All those charts are displayed over a 2-year historical period.
In the next article I’ll focus on highlighting some correlations which may exist between key natural resources and the currencies in which they are usually traded.
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The information above represents analyses and opinions of Sebastien Bischeri, & Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Sebastien Bischeri and his associates cannot guarantee the reported data’s accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Bischeri is not a Registered Securities Advisor. By reading Sebastien Bischeri’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Sebastien Bischeri, Sunshine Profits’ employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
The developing trade war between the US and China has created turmoil in emerging markets, most noticeably in the form of a sell-off of the Chinese stock market and currency.
Trading the trade war is not very straightforward. Firstly, we really don’t know how it will end. It will probably be resolved eventually, but the timing will make a big difference.
The longer it lasts the more damage will be done, and that will have longer-term implications. A longer trade war may also trigger a domino effect through other parts of the global economy. If the trade war was to be resolved fairly soon, prices would normalize quite quickly.
One thing to remember is that it appears Trump is happy to keep the pressure on as long as the US stock indices continue making new highs. If volatility in the US stock market picks up, as it is now, he may be forced to soften his stance.
Several markets related to the trade war are currently very oversold, and should the impasse be resolved, sharp reversals are possible in some of these markets.
Traders should be careful of using the same approach across all emerging markets. Some markets have been caught up in the trade war, while others have deep-seated underlying problems of their own.
Tensions over trade began to grow between the US and China between January and May this year. In May the US began to effectively impose tariffs on certain imports from China by terminating tariff exemptions. More products were added in June and more gain in September.
The Chinese Renminbi has fallen 10% since March as the trade war has escalated. The Shanghai composite has meanwhile lost as much as 25% since the beginning of 2018.
The slide in the renminbi has to a certain extent offset the added tariffs – the weaker currency means US importers are paying slightly less before tariffs are added.
It’s worth noting that the slide in the value of the Renminbi has slowed significantly since July despite the additional tariffs with a double top potentially forming. It is possible that the Chinese Central Bank is supporting the currency to prevent capital flight, as they experienced in 2015/2016.
Not many forex brokers offer to trade in the Renminbi, but a few do. If you are looking to trade the Chinese currency you will be trading the Offshore Renminbi or CNH. The CNY is the Onshore Renminbi which us restricted and managed by the Central Bank.
Turkey has several problems. Firstly, a series of populist policy decisions by the president eroded investor confidence, triggering a selloff of the already structurally weak Lira. This turned into a vicious cycle as much of the country’s government and corporate debt is USD denominated, and effectively rises as the Lira weakens. On top of this precarious situation, the US then imposed new import tariffs on Turkish goods.
The Turkish Lira had lost almost 46% of its value by the middle of August and is now consolidating in what could turn out to be either a continuation or reversal pattern. The benchmark equity index, the BIST100, fell as much as 30%, though it has recovered some of those losses.
The Turkish economy is one of the most vulnerable in the world, and further emerging market volatility could very easily lead to further losses for both the currency and stock market. Investors will probably want to see policy changes before a sustained recovery begins.
Argentina had to turn to the IMF to help prop up its balance sheet in May, and this loan was recently increased to $57 billion. The Peso reached an all-time high of 41.47 against the USD, having traded at 18 in January. Last week, the Central Bank raised interest rates to 65%, indicating how serious the crisis is.
The benchmark stock index recently tested the all-time high recorded in January – though this has more to do with the inflationary effect of a weak currency than with earnings.
Argentina is one of the weakest markets and will be vulnerable to further fallout from the trade war. Traders watching the stock index should focus on the technical picture rather than trying to weigh up valuations and a fluctuating currency.
South Africa’s economy has been under pressure for several years as a result of a scandal-ridden government. In the second quarter, the country officially dipped into a recession.
South Africa’s currency, the Rand, is structurally weak and was also rated by Bloomberg as one of the most vulnerable in the world. The Top40 stock index has made little ground since 2014 as political uncertainty led to an investor exodus.
A certain degree of political stability has been restored and South Africa is beginning to look more like a potential turn around play. South Africa is also a major commodity exporter and highly correlated with China’s economy. If the trade relationship between China and the US is resolved, SA may be a market to watch on the upside.
Commodities, especially base metals like copper and iron ore are another potential play based on how things develop. If the standoff is prolonged its likely to have an ongoing impact on China’s domestic economy, which includes massive infrastructure projects. Besides metals prices, traders can also look to Australia’s large commodity exporters.
Global Tech Stocks
The original FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have a few problems of their own. Not only are they priced for strong growth going forward, but the likes of Facebook and Google are facing growing scrutiny over issues related to users’ personal data.
The trade war has now brought a new dynamic to the sector. Chinese tech giants Alibaba and TenCent are both under pressure due to the trade war. China is also very important in Apple’s life, both as a supplier and as a customer. Ongoing pressure on China’s economy will eventually begin to impact Apple.
As you can see there are quite a few instruments that traders can use to play the trade war, either in the case of an escalation, or continuation or in the case that it is resolved. When choosing a forex broker it’s a good idea to look at the range of instruments offered so that you have the option of expressing trades through several instruments.
As was mentioned at the beginning, it’s impossible to predict how all of this will play out. Traders should, therefore, trade opportunistically and keep an open mind.
The US Federal Reserve will be announcing their decision on interest rates and releasing the minutes of the FOMC meeting today at 18h00 GMT tomorrow. A 25-basis point hike is expected by economists and investors, with another hike in December also widely expected.
Given that the rate decision is taken as a given, all eyes will be on the wording that accompanies the decision and, on the Fed’s updated Summary of Economic Projections which will also be released. In particular, the market will be looking at whether the term accommodative will be removed or softened within the statement.
Jerome Powell is widely expected to say that risks to the economic environment are balanced, but investors will also be interested to see whether he highlights trade policy (i.e. tariffs) as a major risk to the US economy.
In the absence of any unexpected concerns regarding risks, GDP growth or inflation, the market will be looking at the Fed’s projections for the economy and rates out to 2021. This will be the first time the Fed will extend its projected rate charts to 2021, where many believe rates will stop rising and level off.
Overall, the rate announcement is likely to be a non-event and investors will look to other economic data releases, the escalating trade war, and emerging markets for direction.
The US Dollar
US Dollar has weakened since the previous meeting and sentiment remains weak around the greenback, despite 10-year treasury yields hitting their highest levels since 2011. With the market already discounting a 25-basis point hike, the Dollar is only likely to strengthen if the outlook is more hawkish than expected.
There is a very small chance (2%) of a 50bps hike but considering that another hike in December is also expected by most market watchers, even this may not be enough to boost the Dollar.
The US Dollar index (below) has breached support going back to May, and it will take a very hawkish statement for it to regain this support level at 94.75. While all of this appears to point to further weakness, this too may be contained by technical levels against other major currencies.
The EUR/USD has bullish momentum but will encounter resistance between 1.181 and 1.19 – in fact it is already struggling below 1.18. If this area of resistance is convincingly breached, we may see further USD weakness.
Most of the emerging market currencies that have been under pressure in 2018 have consolidated over the past month. In general, risk assets are back in favor, and emerging currencies have benefited from this. However, they do remain vulnerable, and any volatility that follows the Fed decision would probably lead to further weakness.
In all, the rate decision is most likely to turn out to be a non-event. The market is more likely to focus on the longer-term fallout from the trade war with China, something that will impact emerging markets and China, more than the USD itself.
Cautiousness returned to the markets at the beginning of the new week on the introduction of bilateral tariffs between the U.S. and China, as well as expectations of the Fed rates rise. It should also be noted that the tightening of the Fed’s policy forces the central banks of smaller countries to tighten their policies as well. The Central Banks of developing countries (Argentina, Turkey, Russia, Philippines) actively raised rates or unfolded their rhetoric towards the tightening in August and September in response to a very serious outflow of capital and the fall of national currencies.
Despite the similarity of form, the consequences for countries and currencies will vary drastically.
Policy tightening in the United States is a response to increased inflationary pressures because of a strong economic growth and one of the tightest labor market conditions for decades. Measured increases in rates do not hinder the economic growth and even motivate the demand to some extent, as consumers rush to credit at low rates, realizing that soon the lending will rise after the tightening from the Fed.
In emerging markets, it is often a different story. The central banks of Argentina and Turkey have increased the rates very sharply to stop the free fall of national currencies and frightening volatility of the markets. Now, this sharp policy tightening may become a serious strangling for growth in the coming months. Earlier last month, the South African rand sharply decreased after reports of an unexpected recession in the country.
It will not be surprising if in the coming months we will be more likely to receive reports about slowing growths of developing countries or recessions there (the Central Bank of Russia has already warned about such possibility).
The central banks of developing countries will probably have to fight back the attacks like the one we saw in August and September more than once in the coming months. In doing so, they will have to balance between the policy tightening and growth to maintain the attractiveness of the currency for external investors and avoid the economy knockdown.
Global stocks trade mostly higher on Thursday morning on new trade talks between Beijing and Washington. The global positive momentum affects also the developing countries share market which after a sharp decline rebound due to three main reasons.
Positive expectations from trade negotiations
Asian markets are adding after reaching 14-month lows the day before. Positive markets are supported by the reports about China’s invitation to trade negotiations. Previous negotiations did not bring any results and led to a tightening of the rhetoric and tariff expansion. However, the positive markets are fuelled by the sentiment that President Trump’s administration will be slightly more inclined to reach an agreement, having faced a public coalition of 85 industrial groups in the US that oppose the trade tariffs.
Short-term oversold indices
However, an equally important factor is the “fatigue” of the market after a prolonged sale. MSCI for Asia ex-Japan adds 0.5% this morning after touching the oversold area on RSI. Often, the exit from this area increases the craving for profit by speculators, oriented to technical factors that could support the market in the next few days. Futures on Heng Seng 50 add 1.1% per day. After a long sale, the fixation of profit from the weakening can develop a rebound up to the rest of this week, although it is not yet possible to talk about a fundamental reversal to the growth for EM markets.
In addition, weak U.S. PPI data have a moderately positive impact on the markets. The release below expectations has lowered the fears that the Fed will have to go ahead with raising the rates to suppress inflationary risks having pressed on the dollar and supported the demand for risks.
All of the factors above (positive expectations from trade negotiations, short-term oversold indices and weak statistics on inflation in the USA) are not capable to form a sharp rebound separately, but their combination helps the markets to form the ground.
Stocks of the Emerging Markets remain under pressure on Wednesday morning, with positive sentiments prevailing in American markets following strong macroeconomic statistics. MSCI for Asia-Pacific region has been updating its lows since July 2017, losing 0.5% on Wednesday. Hong Kong’s Hang Seng loses 0.2% but is also in the area of 14-month lows. Both of these indices have entered the oversold zone on RSI, which reflects a strong impulse for the decline, but also requires attention to a possible rebound.
However, bears seem to have an upper hand for now on EM against a verbal skirmish between China and the United States regarding the trade. Trump noted that he had a tough stance against China, and Beijing told it would request WTO for sanctions of $7 bln. per year against the U.S. due to non-compliance with the trade negotiation procedure.
On the contrast, the U.S. markets were gaining on Tuesday, relying on strong statistics. S&P500 added 0.3%, having recovered after the data from earlier intraday decline. The Small business optimism index has reached a new high in its 45-year history following the most intensive plans to increase jobs, expand investments and increase stocks. Separately, according to JOLTS report, the number of open positions in July reached a record of 6.94 million, which is greater than the number of unemployed ones that are 6.2 million, also it is noted that the number of those who voluntarily change their work grows. These are the signs of labor market strength, foretelling acceleration of the salary growth that we saw at the end of the last week in Payrolls report in August.
The enthusiasm around the confident growth of the U.S. economy creates expectations of higher rates from the Fed. The markets put 80% chance of the rate rising in September and December versus 71% a week earlier and 60% a month ago. However, this seems to be insufficient for the growth of the dollar. The EM currencies put on pause their decline on the assumptions that strong statistics in the United States will support global growth rates.
The dollar index has been around the 95.0 level since the beginning of the month. EURUSD has retreated this morning to 1.1580 after a failed 1.16 test yesterday, GBPUSD has returned under 1.30.
Strong U.S. data and the news that Hurricane Florence could become the strongest in history, hurting oil production in the U.S., caused a spike in oil quotes. Brent rose to $79, the level, above which oil has not been sustained since May.
As the US economy grows at the fastest pace in decades, unemployment has dropped to the lowest level since the beginning of the millennium. With growth forecast to carry on throughout next year, fuelled to some extent by a fiscal reform introduced by President Trump, the Federal Reserve has signaled that several more interest rate hikes are on the cards. Some observers expect up to 6 before the end of 2019, despite somewhat disappointing real wage growth and political noise from the US President indicating discomfort with the Fed’s tightening of its monetary policy.
In the meantime, the rest of the world lags
The BoE, the ECB and the BoJ still have some way to go before we can talk about an alignment of monetary policies with their US counterpart. But the divergence in central banks’ policies doesn’t completely explain the dollar’s allure. The greenback is becoming the safe haven of choice for many investors. With 10-year treasury yields hovering just below 3%, many no longer look to gold as the first choice of refuge during times of uncertainty. With a global trade war looming, each escalation in rhetoric, from each of the sides, has triggered a rush to the US currency. Even though the current administration in Washington would prefer a weaker dollar, it seems that, at least for now, the appetite for the greenback will remain high every time new tariffs (or threats) on imports from China, Canada or the EU are announced.
This is a particularly sensitive situation for emerging economies running substantial current account deficits and large exposure to debt denominated in the US currency. A bullish dollar means larger debt burdens and higher inflation, which in turn trigger further selling of local assets and have a compounding effect on the devaluation of local currencies. It’s a vicious circle and escaping can be difficult, especially when politics get in the way.
A scenario perfectly illustrated by the current state of the affairs in Turkey, where President Erdogan has somewhat restricted the ability of its central bank to manage the situation. Elected on a populist program, Mr. Erdogan has been interfering with the Turkish central bank’s attempts to substantially raise interest rates to try halting the devaluation of the Lira. Forecasts in the short to mid-term look complex for Turkey and its currency. Even adopting more orthodox damage control methods may no longer be sufficient. Looking at Argentina will probably send shivers down the spines of officials of other emerging economies too. The South American country raised interest rates to 60 percent (the highest in the world) and agreed to a $50 billion rescue loan from the IMF. However, these steps were insufficient to the eyes of investors and, as the Peso piles up losses closing on 50 percent to the Dollar, so far this year, there are growing concerns that the Latin American country may be close to defaulting on its large public debt.
These concerns will of course further exacerbate the situation and increase the chances of contagion to other emerging economies like India, South Africa, Indonesia or Brazil. It is worth noting that not all emerging economies present vulnerable underlying conditions (running large current account deficits, for example) but the market smells blood and some investors may be tempted to pull out of EM economies altogether. On the other hand, it is also possible that as summer comes to an end and liquidity increases, should global trade tensions dissipate, dollar bulls won’t be so bold. Under these more favorable conditions support may be found for EM currencies, especially the ones with solid underlying fundamentals, proving the more pessimistic scenarios wrong.
This article was written by Ricardo Evangelista Senior Analyst at ActivTrades
The current weakness in the developing countries financial markets is the longest since 2008. The similarities go further than that: as well as 10 years ago, the aggravation falls in autumn, when the funds actively review their investment strategies, and the reasons are – chronic deficits and high level of debt.
However, then the source of the problems was developed countries, and at one time there was a popular idea of decoupling, proving that the problems of the developed countries would not have a significant negative impact on the developing ones.
History showed how erroneous these hypotheses had been, and the financial world has proved to be complex and interconnected, and all the countries have not been spared the echoes of the global financial crisis. Nevertheless, developing countries recovered faster, providing an increasingly serious share of the world economic growth in subsequent years.
It is likely that this time, in case of serious problems on the financial markets of large developing countries, the developed markets will be able to maintain immunity only until a certain point when the weakening of the markets will be relatively organized. The supporters of a limited influence on the markets of developed countries may also recall that the Asian crisis of 1997 did not cause any recessions in developed countries. But in 21 years the economies of developing countries have multiplied several times.
10 years ago, countries were coping with the global crisis through joint and coordinated solutions, while the growth of populism and protectionism in politics in recent years risks exacerbating local problems and result in the loss of valuable time to find joint solutions.
Under these circumstances, s& S&P500 index lost 0.5% on Wednesday and futures trading slightly lower, increasingly keeping away from the historical highs achieved a week earlier, despite the strong economic data from the U.S. MSCI has decreased on Thursday morning by 1.8% in the area of one-year lows. Global stocks trading mostly lower on Thursday morning. The dollar index remains near 95.10 since the beginning of the month, having fallen by 0.2% on Wednesday. However, the development of pressure on EM market is able to develop the offensive of the American currency as a safe haven.
The crisis process is intensifying in emerging economies, which also affects their markets and supports the demand for the dollar. S&P 500 lost 0.2% on Tuesday and returned under 2900 level, despite the Amazon’s growth of capitalization over $1 trillion. Asian markets are declining after the data on a business slowdown in China. The published Services PMI was weaker than expected, declining for the third month in a row to the lowest levels since last October.
MSCI for Asia-Pacific region ex-Japan has been losing 0.5% for the second consecutive day; Nikkei225 has decreased by 0.4%. The Asian bourses remain concerned about the possible announcement of the tariffs expansion for Chinese imports by the United States as early as tomorrow. But the markets are not less concerned about the situation in the emerging markets in different parts of the world.
The currencies of Argentina, Turkey, South Africa and Brazil are considered vulnerable to changes of the investor sentiment due to large budget and current account deficits. Investors, first of all, withdraw money from there due to changing prospects of the global growth. A number of hotbeds of concern and the structural problems of those countries do not allow hoping for a quick solution. Perhaps, the problems will even grow in the coming days. The Argentine peso, the Turkish lira, the South African Rand have returned to the area of historical lows. The Indian rupee and the Brazilian Real have updated their lows to the dollar this week and remain close to these levels.
Against this backdrop, there is a growing demand for the dollar as a safe harbor. The structural deficits in emerging markets are further exacerbated by the introduction of tariffs and threaten to stifle China’s growth.
The dollar index rose to a maximum of two weeks at 95.65 on Tuesday but lost most of its growth after the data on production activity in the US had been published. It exceeded expectations by regaining the demand for risky assets in the United States and somewhat softening fears. The U.S. is taking away from China the flag of the growth engine for the world economy.
The EURUSD fell yesterday to 1.1530 at one point but starts the Wednesday close to 1.16. On Friday and Monday, this level was an important short-term support, but now it looks like a meaningful resistance.
Among the macroeconomic news, the course of trades in the pair may be affected by the final estimates of Services PMI for the Eurozone countries. It is also important for the markets to publish the U.S. trade balance, which can bring the international trade back into the spotlight of the markets.
The markets are cautiously on buy for American stocks, and the dollar adds on fears that trade conflicts are seriously stifling the business sentiment in Europe and Asia. The MSCI Index of the Asia-Pacific region ex-Japan loses 0.3%, Nikkei 225 decreases by 0.1%. Pressure on the European exchanges increased after the weak production PMI, indicating a negative impact on the economy of the USA trade disputes region.
The dollar index had kept above the 95.00 level by the end of the day and rising today to trade at 95.43 at the time of writing. EUR/USD is traded near 1.16, as at the start of trading on Monday, and the British pound lost 0.8% within a day for the same time to $1.2832. Pressure on Sterling intensified after the news about the decline in production PMI of the country to the minimum since the referendum on Brexit.
Asia’s business activity is also decreasing on fears of increasing trade wars, which causes the outflow of funds from the stock markets and currencies of the region. The Indian rupee updates its historical lows to the dollar, and the Argentine peso lost more than 3% on Monday. The Turkish lira exchange rate did not change a lot on Monday, as the central bank of the country made it clear that it was preparing some measures to combat a huge jump in inflation. In all cases, the central banks of developing countries are forced to tighten their policy by various measures, which will almost inevitably raise credit rates for companies and consumers and will slow the growth.
PMI indices for Europe are also in decline, but are at a higher level, reflecting a robust growth rate, while in Britain and China the production growth is close to stagnation, and has been losing noticeably since the beginning of the year. The latest estimates for August on the United States will be published today, and we have yet to see whether they confirm or contradict the overall trend. According to previous estimates by Markit, the production activity in the United States decreases but remains at a high level as in Europe. ISM estimates do not mark a certain trend for recent months.
Maintaining a high rate of the economic growth despite the threat of trade wars and tightening of the monetary policy favorably distinguishes the U.S. markets from the rest of the world, creating an objective craving in the dollar and stocks. This draught can be intensified with the onset of autumn as the new fiscal year approaches.
Asian markets have been declining for a third consecutive trading session on the fears of the Chinese-U.S. trade tensions escalating. The odds are that Trump will announce the expansion of tariffs for Chinese goods worth from $50 to $200 bln. on this coming Thursday.
Already introduced tariffs significantly suppress investors’ sentiment – India’s companies are gaining an advantage in the production of goods that have already been tariffed, and Russia’s role as an LNG importer for China is growing. The escalation of the trade war risks further disrupting the habitual trade flows in the long term. In the short-term, it risks putting serious pressure on the stock markets. The Shanghai index is traded near the lows of 2.5 years. MSCI Asia-Pacific region without Japan has lost 0.7% this morning; Nikkei225 has decreased by 0.5%.
The demand for protective assets supports the dollar. The dollar index has begun the trading the week at 95.10 – week highs. The EURUSD pair is once again testing support for 1.1600. The Australian dollar at the start of the new week has fallen to 0.7160, the lows since January 2017. The New Zealand dollar sank to 0.66, returning to a decline after a rebound in the previous two weeks. The demand for the protective yen and the dollar can remain the predominant theme of this week in anticipation of important news on the labor market and the announcement of Trump tariffs.
The dollar index in the second half of the week returned to the area above 95 on the turbulence of emerging market currencies, including Argentina and Turkey. These levels of the dollar index continue to act as a strong level of support and attract interest in buying on the dips strategy amid the rising tensions around traditional high-yielding currencies.
The British pound has fallen under 1.29 this morning, giving back more than 60% of the last week splash, when the EU claimed that they were ready to offer a deal to Britain. From the technical analysis side, the British currency has compensated a short-term overbought and could be under moderate pressure following the global markets.
The markets have been under pressure on Thursday and at the start of trading on Friday, the cautiousness is growing. Global stocks closed the week lower although US indices finished the week flat.
The events around the Argentine currency were in the spotlight. The central bank of the country raised the interest rate from appalling 45% to unimaginable 60%, amid the depreciation of the exchange rate by more than 20% intraday, and despite the assistance of the IMF, which was offered earlier. This dynamics has brought a cautious attitude to markets and caused the sale-off for the risky assets.
The Turkish lira decreased by more than 6% intraday on Thursday after the events around the peso and against the backdrop of the resignation of a major official in the Central Bank of Turkey. The Lira corrected on Friday to close the week at 6.55.
Despite all the mentioned above, yesterday’s sale of currencies and markets of the developing countries seems too emotional. The main problems are not solved, so after some rollback, we can see that the pressure on these markets may be increased.
At the same time, the futures on S&P500 are increasing the losses keeping away from the record levels. The fact that at the beginning of the week the indices have risen to the oversold area also works in favor of the rollback development. The rollback can be a harbinger of a deeper correction when taking profit flows from growth on the US markets can coincide with a storm in emerging markets.
Currently, emerging markets currencies remain the main focus of financial markets.
This week the Indian Rupee crossed 70 for the first time in its history. India’s currency crossed the psychological level on Monday and traded as high as 70.80 on Wednesday. The Rupee is just one of several emerging market currencies to come under pressure in the wake of the Turkish Lira’s collapse. However, the Rupee may be vulnerable to further weakness regardless of the weakness of the Lira.
The Turkish Lira is now down about 35% since the beginning of the year. The Argentinian Peso has lost close to 37% of its value in 2018 after the country was forced to turn to the IMF in May. Other emerging market currencies losing ground are the Indonesian Rupee, the Philippine Peso, the Brazilian Real and the South African Rand.
However, not all emerging market currencies are losing ground. The Mexican Peso has gained ground in 2018, and most South East Asian and East Asian currencies are holding their value.
Almost all the countries that have seen their currencies come under pressure are those with wide, or widening, current account deficits. In India’s case, analysts have been worried about the deficit for some time, and these fears were confirmed when the commerce ministry announced on Tuesday that it had hit a five year high of $18 billion in July.
The current account deficit is growing due to rising oil prices and a surging USD, and FDI and foreign institutional investment flows are not high enough to offset the widening deficit. The rising oil price alone could see India’s oil import bill growing by $26 billion in 2018 and 2019, and is unfortunately likely to offset any export gains due to the weaker currency.
The central bank has also raised rates twice, in June and August, the first rate hikes in four years. It may hike rates further if the currency continues to weaken, though it will be cautious about doing so if economic growth slows.
India ratings and research have also just lowered its growth forecast for the year to 7.2%, from 7.4% sighting rising inflation due to oil import costs.
Going forward, the most important factors to watch will be the oil price and the strength of the USD. While developments in the domestic economy will play a part, they are likely to be outweighed by these external factors. Some analysts are forecasting the Rupee to reach between 72 and 73.55 by year-end, based on current fundamentals – but these can change rapidly.
If current fears over emerging market currencies ease, the Rupee will probably retrace to an extent. Short term support may come into play at 69.70, and if that doesn’t hold, the breakout level at 69 could be retested. It seems very unlikely that the currency would strengthen below that level without a substantial change in the economic environment. A likely trading range for the remainder of 2018 may be 69.70 to 72.
While the selloff of the Turkish Lira has played its part in the weakness we are seeing in the Rupee, fundamentals are equally to blame. The Rupee is not one of the currencies that is most influenced by emerging market sentiment and domestic factors rather than speculation play more of a role in the price.
Traders should, therefore, pay as much attention to oil prices and domestic developments as they do to sentiment or technical levels.
The currencies of developed countries are moving within a narrow range at the beginning of the eventful week. The dollar index is around the mark of 94.50 and has been trading for two months in a range of slightly over 1% around this level. This quiet trading environment can be broken this week after the announcement of the decisions took by the Bank of Japan, the Fed, and the Bank of England, as well as the publication of the U.S. employment data.
Developed markets currencies are experiencing a period of low volatility after the dollar growth period from the end of April to the end of May. The closest market focus is how the Bank of Japan adjusts its policy. More hawkish tone can push down the Asian markets at a time when they are vulnerable amid the fears of trade wars.
With the meetings of the largest central banks and important statistics, the week ahead is able to open a period of increased volatility after a long period of a summer lull. Earlier, the Fed’s head made it clear that the U.S. central bank is set to tighten its policy. Market participants will closely monitor if the Fed is set to raise its rates in September while remaining committed to the 4th increase in 2018.
The Fed’s hawkish rhetoric can increase the difference in the dynamics of developing countries’ currencies. Unlike the major world currencies, in the EM there has been a noticeable differentiation in recent weeks.
The Russian rubble enjoys the continuation of high oil prices period. The Mexican peso gains after the elections last month and on the expectations of the profitable negotiations on NAFTA.
At the same time, the Chinese yuan has been falling for the recent two months at its highest rate in many years on easing the PBC policy and on fears about the consequences of trade wars with the United States. The Turkish lira declined to all-time lows due to the threat of the U.S. sanctions and after the Turkish CB had kept the rates against a widely expected increase last week, which was perceived as a loss of independence of the local regulator. The Argentine peso is also under attack, despite the assistance from the IMF to the country. The Indian rupee is close to the historical minimum to the dollar, in spite of the strong growth of the economy.
The dividing line for the currencies of developing countries became the balance-of-payments factor. Turkey, India, and Argentina have a significant deficit and are dependent on the inflows of capital from outside. China formally has a surplus, however, the economy of the country’s regions depends on outward investment, requiring favorable investor relations.
At the turn of the 20th Century, Argentina’s rapidly developing economy had effectively established itself as one of the most prosperous economies in the entire world. With access to a diverse array of natural resources, relatively little exposure to the international conflicts of the era, and a well-educated workforce, many economists once believed that Argentina was in a position to eventually outperform the United States.
However, the 20th Century was one that was plagued with multiple waves of revolution, foreign interference, and extreme economic turbulence. Frequent regime changes and stagflation have also been frequent sources of conflict. Though Argentina still maintains a GDP per capita that is well above the global average (nominally 53rd in the world), there is no denying that they have not been able to live up to their once promising potential.
Despite receiving a $50 billion assistance package sponsored by the International Monetary Fund (IMF) earlier this month, there still remains a great deal of uncertainty regarding Argentina’s economic future. This article will briefly review the turbulent history leading up to the status quo and discuss possible future outcomes that Argentina may endure.
A History of Volatility
Argentina’s economic history is one that has been marked by numerous incredible periods of growth followed by severe periods of economic recession. Starting around 1880, Argentina’s agriculture and the beef-centric economy began to experience several decades of foreign investment as well as multiple waves of immigration. Between 1880 and 1905, the economy was able to grow at an astounding rate of roughly 8% per year.
Even considering relatively large levels of income inequality and the global turbulence caused by the Great Depression, mid-century Argentina still enjoyed a GDP per capita level similar to those in Western Europe. However, shortly following World War II, the populist administration of Juan Perón would trigger multiple waves of economic complications. Though nationalizing a wide variety of industries—such as railroads, banks, and numerous others—may have helped accelerate their development, Perón’s aggressive actions would help contribute to the nation’s average inflation rate of 26% between the years 1944 and 1974.
The primary benefit of Perón’s approach to policy making was that Argentina was able to develop a sizable middle class with a firm commitment to the rights of union members. But eventually, as an extension of the Cold War, a military dictatorship seeking to privatize the nation’s industries would gain power starting in 1976. Combined with stagflation, corruption, and the actions of the neoliberals who would eventually replace the dictatorship, Argentina experienced an incredible amount of economic turbulence between the late 1970s and early 2000s.
Though the nation was able to ultimately move from 10.9% GDP shrinkage in 2002 to 8.8% GDP growth in 2003, recent years have witnessed new waves of economic uncertainty. The goal of the loan from the IMF was to create levels of stability similar to those that were experienced between 2003 and 2008.
Uncertainty in the Status Quo
Currently, the continued economic uncertainty in Argentina is caused by a wide range of contributing factors. The country has once again been experiencing average annual inflation rates greater than 25% and the Central Bank of Argentina recently decided (May 2018) to raise the interest rate on pesos from 27.25% to 40%–notably the highest interest rate of any centralized currency in the world.
In an effort to make the nation’s economy more competitive (striving to outperform Brazil, Mexico, and China), Argentina recently decided to accept a $50 billion loan from the IMF. This loan may help the country to stabilize many of its debts in the short-term, though the nation’s incredible rate of currency deflation still remains a universal concern.
President Mauricio Macri was undeniably voted in during a time of great economic uncertainty and complications. As the first President of Argentina since 1916 who doesn’t identify as a Peronist or a radical, Macri’s approach to economics offered many of his voters the possibility of change. However, in the context of the current global economic climate, it seems that many of Macri’s policies may be creating a new set of issues, rather than effectively solving the problems he inherited.
While Macri’s “gradualist” approach to the economic policy may suggest the possibility of economic stability and predictability, it may also prolong the process of bringing the country’s high levels of inflation back down to acceptable levels. On the other hand, the fact that the administration decided to remove all forms of exchange controls before the economy had a chance to stabilize may deter foreign investors from considering Argentina to be a legitimate investing option.
Looking Towards the Future
As the history of Argentina’s economy and the turbulence in the status quo strongly suggest, the future of what was once the pride of the New World is something that will certainly be quite messy. There is no clear nor easy solution that will be able to effectively resolve the country’s economic woes overnight. Every decision the Macri administration could possibly make—even if they choose to exercise a greater degree of discipline—will involve a significant number of opportunity costs.
However, there may be a few reasons that Argentinians can be generally optimistic. Despite a century of economic mismanagement and volatility, the material conditions for a globally dominant economy have not gone away. Argentina is still one of the largest nations in the world and has more available natural resources per capita than many others of its size. Argentina is still in a very temperate climate zone, has one of the world’s most important cities (Buenos Aires), and has a generally diversified economy. Lastly, Argentina has done relatively well at avoiding international conflicts (save for the Falkland Islands and a few others), which may help encourage an eventual increase in foreign direct investment. With the right and responsible economic leadership, Argentina has all it takes to become a stable economic nation. Otherwise, Argentina is on a mid rollercoaster ride.
The economic difficulties of Argentina are certainly far from being over with. However, Macri’s position as a non-radical, non-Peronist alternative suggests that future change in a positive might still be possible. The primary problems in the status quo are high levels of inflation and high degrees of economic uncertainty. If these problems can be resolved in a clear, well-orchestrated manner, then the economic potential that this beautiful nation still possesses may someday come to full fruition.