- Brazilian Real surged 4.35% versus the Dollar Friday, bucking a 6-day streak of losses
- Brazil’s central bank offered intervention for a fourth day after a trucker protest slowed the economy
- The protest’s added to inflation views and prompted speculation of a rate hike from the central bank
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The Brazilian Real posted a staggering rally against the Dollar Friday as a collection of factors came to buoy the currency of the largest Latin American economy. The climb was seemingly fueled by an unexpected uptick in inflation. The consumer price figure came in at an annualized rate of 2.86% in May versus an expected 2.74%. Although inflation is well below the targeted 4.5%, the increase was a surprise and some analysts believe the recent trucker strike will increase inflation again next month. Exerting similar pressure, the central bank of Brazil has engaged in intervention aimed at arresting the currency’s slide this week, increasing the sale of currency swaps hoping to cushion volatility but with little effect. Today, the Brazilian central bank conducted a fourth day of currency swap sales and the Real seemed to have found its feet.
Chart 1: USD/BRL 1 Hour, June 3-8
Despite the willingness of the central bank to intervene, the lack of response through three days of direct actions calls into question whether it was really the group’s efforts that stoked the rebound. It was no doubt a contributing factor as was the speculation that the Brazilian central bank will increase interest rates. Further uncertainty from the looming presidential election in October likely contributed to speculation. The Latin American nation has seen falling interest rates since June of 2015 when the interest rate was 14.25%. Currently, the benchmark rate is 6.50%, a record low and unchanged from the central bank meeting in May. What is remarkable about Friday’s rally is that it comes at a time when emerging markets are coming under intense pressure. The segment of economies and assets are finding themselves at risk with rising interest rates in the United States and the advance of global trade wars. The Fed will meet next week to release their interest rate decision with heavy speculation of a rate hike which will further raise costs for emerging markets with debt denominated in dollars.
The rate decision by the Fed is not the only factor affecting emerging markets as a trade war waged by the US begins to take effect. With an opportunity to appeal to the United States, members of the G-7 are voicing concern over the tariffs this weekend at a summit in Canada. Officials of other nations will be watching the summit closely for any developments in the trade war and the effect it will have on their economy. Already, emerging markets like Turkey, India, and South Africa have seen losses in their currencies versus the dollar as the fear of fallout from broken trade lines begins to take its toll for these countries’ exports and risk appetite in general.
For live coverage of the Fed’s rate decision next week, join John Kicklighter’s live webinar coverage of the event.
Chart 2: USD/TRY Daily, Year to Date
Chart 3: USD/IDR Daily, Year to Date
Chart 4: USD/ZAR Daily, Year to Date
US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears
TALKING POINTS – Iran, Sanctions, CRUDE Oil, Trump, Emerging markets
- US oil export sanctions against Iran will be enforced on November 4th
- Net-importers in emerging markets likely to suffer from higher prices
- 1970’s oil crisis, embargo may haunt markets as Trump buckles down
The Trump administration’s trade wars and economic nationalism have caused severe volatility for most of 2018. The White House also withdrew from the 2015 multilateral Iran nuclear deal – known as the Joint Comprehensive Plan of Action – in May, and has re-imposed sanctions. The most devastating will be an oil embargo that is scheduled to be take effect on November 4th.
In the 1970’s, the US imposed an oil embargo against Iran that led to a surge in prices. The jump in energy costs radically affected markets. The US – which at the time was coming on the heels of massive public spending programs– had its inflationary pressure skyrocket.
The administration’s public spending agenda, coupled with the sanctions against Iran, echo a dangerously similar narrative the world saw 39 years ago.
1979 OIL CRISIS
In 1979 – amid the turmoil of the Iranian Revolution – political radicals stormed the US Embassy and took 52 Americans hostage. In response, US President Jimmy Carter froze billions of dollars’ worth of Iranian assets in the United States and enforced an oil embargo.
The decrease in oil exports – adding to growing fears of further disruptions – caused prices to climb. Adjusted for inflation, the price per barrel stood at around $55 in 1978. In 1979, the cost skyrocketed to $97 and peaked at $122 in 1980. In 1981, the hostages were released and the price began to fall.
See our full interactive history of trade wars here.
Some economists and historians argue that “precautionary demand” was an influential contributing factor to the increased cost of oil. This same fear may be rearing its ugly ahead again today.
2018 OIL EMBARGO ON IRAN
After unilaterally pulling out of the nuclear deal – due to allegations that Iran was not cooperating with the International Atomic Agency – the Trump administration hit Tehran with two waves of sanctions. The first included a ban on any transactions involving the US Dollar, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The White House has also banned imports of Iranian carpets and foodstuffs.
The second wave will be the oil embargo. Trump warned that anybody who conducted business in the Iranian market would face “severe consequences”. The ban requires that all importers have to immediately cut off their supply from Iran by November 4th. Any countries that violate the ban face the possibility of sanctions. The EU responded by pledging to protect European firms by activating a blocking statute established in 1996. It allows European businesses to operate under US sanctions without incurring any penalties.
The EU’s defiance to the US adds to the growing tension between allies amid the escalating trade wars. The sanctions also empower hardliners in the Iranian government. This makes the possibility of repairing relations and easing international tension much more difficult.
EFFECT ON MARKETS
If the US imposes sanctions or tariffs against the EU for conducting business with Iran, they will almost certainly retaliate. In that event, sentiment-linked assets are likely to suffer and anti-risk currencies like the Japanese Yen or Swiss Franc will probably rise.
Euro Falling on Trump’s Iran Sanctions Announcement
Crude oil has reached a four-year high, with the Brent benchmark trading at around $84/barrel. Rising prices are damaging for net importers in emerging markets. If Trump digs his heels in and commits to limiting Iran’s oil exports, emerging markets are likely to suffer.
Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech
- GBP gapped lower versus USD, responding to Theresa May’s rejecting of an exit deal
- GBP/USD’s downside momentum continues dominant downtrend for majority of 2018
- Key economic data and BOE Gov. Carney’s speech may further influence the British Pound
Find out what retail traders’ British Pound buy and sell decisions say about the coming price trend!
The British Pound fell against the US Dollar during weekend trading as Brexit negotiations between the United Kingdom and the European Union hit an impasse. UK Prime Minister Theresa May’s Brexit Secretary Dominic Raab and EU Chief Negotiation Michael Barnier were unable to reach an agreement on a draft treaty, leading PM May to label the deal a “non-starter”. Barnier later mentioned that some key issues remain open, including the Irish backstop.
GBP/USD 1-Hour Chart
This is the latest in ongoing Brexit turmoil, and could possibly bode ill for the Sterling’s recent upside momentum. If a deal is not reached, the United Kingdom would exit the EU and be subject to World Trade Organization rules, potentially causing declines in GBP. Furthermore, longstanding political uncertainty and tensions regarding Brexit have caused the GBP to weaken for the majority of this year. Furthermore, an increasingly hawkish Federal Reserve and haven demand amidst EM contagion fears and trade wars have caused the greenback to strengthen, intensifying the currency pair’s bearish action since April 2018.
GBP/USD Daily Chart
Looking ahead, this is a week of high economic activity for the British Pound. On Wednesday, the UK Statistics Office will release consumer inflation data for the month of September. In addition, Bank of England Governor Mark Carney is set to give a speech on Thursday, with forward guidance possibly dictating next moves for the Pound. However, ongoing Brexit negotiations will continue to take center stage and overshadow economic data’s influence on the Sterling. Developments upcoming summit of European Union leaders focusing on Brexit could cause volatility shocks to the currency pair.
GBP/USD Trading Resources
— Written by Megha Torpunuri, DailyFX Research Team
Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit
Market participants will return with caution this week. Following the rout in speculative assets from shares to emerging markets to Yen crosses, there is an understandable tension amongst investors. In this environment troubling news in trade wars, Chinese growth, Euro-area stability or any number of key themes can readily find traction.
Fresh developments coming out of the U.S. economy may curb the recent selloff in USD/JPY as Federal Reserve officials see a risk for above-neutral interest rates.
After trading to four year highs to open the month, Crude has come off the highs along with risk sentiment, but you crude appears to have fundamental support that could keep bulls confident.
It may be uncomfortable but sitting on the fence is the best place to be ahead of next week’s Brexit updates and EU Summit
Gold was the beneficiary of safe haven demand this week after the Dow lost over 1,300 points in just two days.
The Australian Dollar held up quite well to the intensification of one or two factors which have stymied it this year. Don’t rely on that continuing
China’s weak economic growth could add more bearish momentum to the Yuan; at the same time, Chinese regulators may try to avoid extreme volatility.
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
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