What Will Oil’s Collapse Mean For EM FX?
Matthew Weller | Jan 12, 2015 03:13PM ET
Arguably the most important economic storyline as we head in 2015 is the precipitous drop in oil prices. From its June peak at above $107, West Texas Intermediate (WTI) crude oil has fallen a staggering 57% over the last 7 months to trade at just $46 today; the drop in the Brent contract has been even more dramatic. We’ve discussed the impact of this strong trend on G10 oil exporters like the Canadian dollar and Norwegian krone already, but oil’s collapse will also help shape the trading landscape for a variety of EM currencies as well.
In general, the drop in oil prices should serve as a net positive for most EM economies. Stating the obvious, the biggest beneficiaries of the drop in oil prices will be emerging markets that import most of their energy needs; among the most widely traded EM FX pairs, that should benefit the Turkish lira (where fuel imports represent about 5% of GDP) and South African rand (where fuel imports are about 3.5% of GDP). Conversely, EM economies that are dependent on exporting oil will be at risk of slowing economic growth or even outright recessions. There are obvious FX implications in this category for currencies like the Russian ruble, where fuel exports represent roughly 20% of GDP and surprisingly, the Mexican peso, which is a small net exporter of fuel.
Although the impact of falling oil prices is expected to benefit most EM economies, it will also pull inflation lower across the board. This disinflationary aspect of falling oil prices will marginally decrease the likelihood of interest rate hikes by EM central banks. The upshot of these competing factors is that the overall impact of falling oil prices on EM FX as a whole should be relatively limited, giving a modest boost to oil importers like the ZAR and TRY and hurting oil exporters like RUB and, to a lesser extent, MXN.
In Depth: USD/TRY
In some ways, the Turkish lira is in a “sweet spot” to rally on the back of falling oil prices. As noted above, the Eurasian country is a relatively heavy importer of oil, but due to the relatively high inflation rate in the country, the CBRT may be forced to keep interest rates at an elevated level in 2015. Therefore, the lira could benefit from a combination of stronger economic growth and carry trade flows this year.
The technical view is also supportive of near-term lira strength. USD/TRY has rallied so far this year and is trading at a 1-month low as we go to press. The pair just dropped below a key area of previous-resistance-turned-support at 2.3050, suggesting the current weakness could extend further. Meanwhile, the MACD has rolled over and is now approaching the “0” level, while the RSI indicator is testing critical support near 40. If bears can push USD/TRY through 50-day MA support at 2.2750, previous support at 2.20 may be the next stop.
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Of course, Turkey has its own share of political uncertainty and risk (to say nothing of the recent intransigence of its Black Sea neighbor, Russia), but if those issues remain manageable, the lira could flourish in early 2015.
Source: FOREX.com
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