EM rundown: USD/ZAR and USD/RUB test high amidst panicked markets
City Index August 25, 2015 12:32 AM
<p>Traders are still reeling after this morning’s shocking “flash crash.” Liquidity completely dried up at the opening of the North American trading session, with the […]</p>
Traders are still reeling after this morning’s shocking “flash crash.” Liquidity completely dried up at the opening of the North American trading session, with the Dow Jones Industrial Average falling over 1,000 points from Friday’s close, EUR/USD surging to above 1.1700, and USD/JPY collapsing nearly 350 pips in a 15-minute period alone. Not surprisingly, skittish traders also took the opportunity to sell “risky” emerging market currencies en masse. Currencies that are exposed to China, where the initial spark of fear emerged last week, have been particularly hard hit.
USD/ZAR: All-time high in sight, but potential for a pullback first
As of writing, USD/ZAR has quietly snuck up to test its all-time high near 13.75 on the back of concerns about China’s growth. This move has clearly spooked the South African Reserve Bank (SARB), which recently issued a statement noting, “In the event of developments that threaten the orderly functioning of markets or that may have financial stability implications, the SARB may consider becoming involved in foreign-exchange markets to ensure orderly market conditions.” In other words, the SARB stands ready to intervene and support the rand if the selloff worsens.
While the pair could see a short-term pause or pullback off resistance in the upper 13.00s, the longer-term bullish channel will remain intact as long as rates hold above about 12.00. Meanwhile, the secondary indicators are also painting a supportive picture, with the MACD trending higher above its signal line and the “0” level and the RSI holding in a bullish range above 50. Given the bullish fundamental and technical catalysts, traders may consider fading near-term dips in USD/ZAR in order to take advantage of the strong long-term uptrend.
USD/RUB: Oil’s collapse could create record close
Meanwhile, Russia’s economy could also be casualty of slower growth in China, especially with the recent precipitous drop in oil prices. Traders are already considering the longer-term implications of this month’s developments, with USD/RUB rallying to test its record closing high at 70.50. The pair has been trending higher for the last several months, so it’s not surprising to see the MACD signaling bullish momentum and the RSI in overbought territory.
As long as oil prices remain on the back foot, the ruble will struggle to rally. A confirmed breakout above 70.50 would open the door for a potential continuation toward 75.00 or even the intraday record high at 78.80 next. Meanwhile, traders may look to fade any short-term dips back toward the mid-60.00s, if seen.
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