rahul.khanna's picture

Which emerging market currencies still offer sell opportunities vs. USD?

USD is rallying sharply since the start of July. S&P 500 Equity Index and U.S. 2-year yields have both had a fall, but despite this, scope exists for a further upside as market factors in a rate rise mid 2015. However, disappointing data over the coming days may be the likely trigger contrarian seeks, for a correction in USD before upside resumes.

Emerging market currencies sell-off accelerated from the start of September as liquidity continues to drain up with QE coming to an end in October along with positive data for US. We will need to see investors remain positive amid slowing growth in China & rising interest rate in US to stall a further fall.  Fund flows & bond holdings data signals that emerging market investors are still holding their positions for carry trades, and even though US is tightening its monetary stance, ECB & BOJ are further easing its monetary policy.  However, as the worries over US policy & USD volatility rise, portfolio flows will be more sensitive to many emerging currencies. 

Emerging market currencies that do not offer stable & business friendly climate are likely to remain weak. Losses have already been amplified for such currencies; TRY due to ISIL threat/war, RUB due to further sanctions, BRL with elections looming. While in Asia, Hong Kong protests have also aided fall in CNH, MYR & THB. We don’t see any reason both fundamentally & technically that might make us believe a reversal is eminent, especially against currencies with unstable environment.