EM FX Monocle – Into the summer lull
”Life after the storm” was a good title for our May EM FX Monocle – indeed, EM FX volatilities have declined and the currencies started to recover in June. The European problems haven’t been resolved yet, and there are no quick fixes, but with the sentiment worse as it is, and the policymakers’ readiness to intervene, we believe the worst is behind us in this cycle phase for EM FX.
• EM FX declined sharply in May but managed to stabilise in June, now hovering just above water YTD. In particular the high betas such as the HUF, the PLN and the MXN performed. There is room for more, we expect, as long as no more really bad news hits the market.
• Even with further declines in commodities in June the commodity currencies have picked up from recent lows. Acknowledging the risks we see further performance: in the EM world the RUB is the attractive pick.
• EM FX implied volatilities have declined in June, but still remain at high levels relative to April 2012 and relative to G7 volatilities. The summer range-bound markets may bring them down further.
• If we are wrong, and risk-off intensifies again, do not expect to see such sharp EM FX losses as in May: now nearly all EM central banks, even Brazil’s, have turned to protecting their currencies against declines. In this respect we still prefer the TRY the most, as the CBT prefers to keep rates high.