The strong stock sell-off in the US earlier this week was being driven by technology stocks and in a more fundamental sense a concern around the elevated nature of market valuations entering earnings season. This appears to have been the cause for yesterday’s sell-off as well, which was not something to ignore given the Nasdaq’s largest daily decline since 2011. This sparked some risk aversion to drive market participants back towards the safety of US Treasuries. EM currencies then find themselves fortunate that the dollar is weakening as aggressively as it is in the short term, as this has allowed for brief disconnect between FX markets and the stock and bond markets.
The dollar found itself unable to hang onto intraday gains as US interest rate expectations have started to make a notable turn lower and this holds the ability to extend the life of the EM carry trade. However, amidst another positive performance for EM currencies yesterday, the rand was a clear underperformer. This follows on from the downside surprises to both SA mining and manufacturing readings for February. Often these data readings are brushed aside but the market cannot ignore this sort of weakness as a a development which will affirm the SARB’s very high reluctance to hike rates further.