Broadly, Emerging Market (EM) currencies and assets are horribly out of favor and have been trading poorly, led by the King of the devaluation and default, Argentina. The price of a dollar is currently about 40% higher in just 2 months and its ripple effects are terrifying markets. The country has had a track record of hyperinflation and severe currency devaluation, and consistent growth in the central bank’s balance sheet has shown that the printing of additional money has created excess supply and drove the value of the currency down. This crisis has even pushed officials to negotiate a $50bn line of credit from the IMF, but until policy matches the IMF’s generosity and investors again feel comfortable with the US Dollar bonds they fought to buy 2 years ago, Argentina remains in the spotlight.
Worse, with summer liquidity just around the corner, the likely risk is things deteriorate, probably rapidly, and this creates the perfect storm for EM crises, which thrive in thin markets.
In our week on week comparison, the Turkish lira, South African rand and Mexican peso also have shown weakness and stand out as poor performers. Looking ahead, we keep our eyes on headlines coming out of rising trade tensions between the US and China to see how markets will react.
By Malcolm Day, Managing Director, FX and Treasury Management Emergent Technology
vs 1 wk ago
If we close down here (below 1290 a new 2018 low), my bullishness and optimism are sidelined. Itr makes no sense but don't fight it, until 1290 is regained or the $ rolls back over
We said a close above 16.88 opens 17.20 and it did... looked great on Friday, at 17.25. However, a record shift in speculative positioning tipped the boat over, hence -4% in a session. Buy dips to 16.10
XAU Vol %
Unlike the $ index, this one's behaving perfectly - price action confirms it's turned. Heads to 72 then 62
I'm sticking with 95.0 was/is the top and Trump's policies take it back down below 90.00
US 10yr %
The Fed hike was a non-event, fully priced. 2.90-3.05 still the range, with 3.05 more vulnerable
Lower highs and higher lows usually signal a break out is coming. Continue to watch 2530 below
Bounced but attracting no attention
Emerging Market Currencies
Big reversal, the Rupee trades badly - gives back ground with alarming ease. 68.50 above is the key
Over time, need to see if this triggers retail to react, or stay away
The basket is doing its job, no story here
22.00 could be on here and as it's being labelled the 'new EM bellweather', look for correlation trades. The southern neighbors aren't helping…
We said 27.0 first stop - it sailed straight through. Round numbers, so 30.00 - the first level we picked when 20.00 broke. A proper mess.
The BCB will intervene ($2bn daily) and hike rates but while Argentina is in play, it's in trouble. If 3.97 goes, it's 4.25, maybe 4.30
EM contagion at its best… If we're just squeezing positions, it fails here at 13.50. Otherwise, it's 14.00, maybe 14.55
Showing the beauty of a Central Bank in control (for now, trouble ahead). Note, RMB auctions are happening, announced last week, 15bn… a real alternative to $$s
So 17.75% rates aren't enough… Worryingly, we're seeing new closing highs, suggesting 4.90 may gain be tested
Central Bk holding it steady
We said the 2018 lows at 6430 and 6000 MUST hold, or it's 5000, probably quickly, violently and now we're at the first. BIS comments today deeply negative
Well 500 has gone, so there’s little to stop it before 360.. Ditto BIS comments
A new addition to the list, 0.455 is key here