7 Feb 2014
Flash: EM currencies likely to recover - Nomura
FXStreet (Bali) - According to Nomura Strategists, since we are not in a systemic EM crisis, the currencies with the best prospects to recover should be PLN, MXN, KRW and MYR.
Key Quotes
"We have in Candidates for EM FX recovery focused on a three-dimensional selection process, focusing on valuation, real rates, and external vulnerability, to pinpoint candidates for recovery. By using this approach, we conclude that it makes sense to trade PLN, MXN, KRW and MYR from the long side in coming months (sorry, if there are no major surprises here)."
"We also discussed in An EM Crisis? that while we cannot see outright crisis dynamics from a global perspective at the moment, political risk is elevated in Turkey, Ukraine, and even Brazil, and the economic tail risk in China is significant. As a clear turning point for EM external imbalances has yet to be reached and since the impulse for changing capital flows (a shift in monetary policy in the US) is still ongoing, it is probably too early to call the end of the EM weakening trend. "
"That said, we do not think, except for specific countries, that the dynamic has "crisis-like‟ characteristics. In addition, we think that value is starting to be created, especially in forward space (in certain currencies). For the next one to two months, the right strategy may be to trade $/EM from the long side still, but at the same time take advantage of elevated implied vol (too high for a non-crisis adjustment) by selling dollar calls (in effect a „covered call‟ strategy on the dollar vs EM)."
Key Quotes
"We have in Candidates for EM FX recovery focused on a three-dimensional selection process, focusing on valuation, real rates, and external vulnerability, to pinpoint candidates for recovery. By using this approach, we conclude that it makes sense to trade PLN, MXN, KRW and MYR from the long side in coming months (sorry, if there are no major surprises here)."
"We also discussed in An EM Crisis? that while we cannot see outright crisis dynamics from a global perspective at the moment, political risk is elevated in Turkey, Ukraine, and even Brazil, and the economic tail risk in China is significant. As a clear turning point for EM external imbalances has yet to be reached and since the impulse for changing capital flows (a shift in monetary policy in the US) is still ongoing, it is probably too early to call the end of the EM weakening trend. "
"That said, we do not think, except for specific countries, that the dynamic has "crisis-like‟ characteristics. In addition, we think that value is starting to be created, especially in forward space (in certain currencies). For the next one to two months, the right strategy may be to trade $/EM from the long side still, but at the same time take advantage of elevated implied vol (too high for a non-crisis adjustment) by selling dollar calls (in effect a „covered call‟ strategy on the dollar vs EM)."