FxWirePro: A glimpse through commodity driven currencies - EMFX and Antipodean trade basket

The big winner was the Mexican peso, back to levels it hasn’t seen since last summer as ‘Trump trades’ are unwound all over the place. In G10 there are several currents affecting the markets at the same time.

The first was the correction by the Euro, after several weeks of growing long positions, bullish sentiment and gains that look excessive relative to relative interest yield moves. That’s taken European currencies to the bottom half of the table.

The second theme is of stability in China and indications that the recent CNY appreciation may have run its course. With commodity prices stabilizing at the same time, that has helped underpin AUD and NZD. The final theme has been the UK election, resulting in a minority Conservative government and a sharp fall by Sterling.

In EMEA, the moves are smaller and the EURUSD correction dominates. ILS, RUB and ZAR are all less Euro satellites than the lower-yielding European currencies, which have hardly moved. A small fall by ISK is not noteworthy. The BOI is trying to stop the shekel’s remorseless advance but really isn’t having any luck as it moves into the top 4 of the 2017 rankings.

The peso, this year’s strongest major currency, continues its rehabilitation. The Government had a narrow win in a key State election last weekend and that gave MXN a lift which has sustained it all week. At the other extreme, the market is waiting for a court ruling on the so-called Carwash corruption probe, and the BRL is (still) under pressure. Between those extremes, stronger copper prices helped the CLP a bit.

In Asia, moves are very small. The USDCNY rate has stabilized and that stability is felt around the region, but none of the EM Asian currencies has moved by anything like as much as NZD and AUD, the real winners from calmer markets.

Why do you have to stay short in USD vs MXN, ZAR and TRY:

The MXN, ZAR and TRY are our favourite carry trade currencies. The expectation of higher oil prices, underweight bond positioning, a shift in US rhetoric on trade, Banxico tightening nearing completion, and turning inflation dynamics supports a constructive stance on the MXN.

In South Africa, politics have a greater risk of turning positive than deteriorating further and coupled with inflation ticking lower, the current account is on an improving trend and commodity prices finding a base, this will propel the ZAR stronger.

In Turkey, inflation has probably peaked amid tight funding conditions, and attractive valuations make a compelling case for long TRY exposure.

Use optionality for antipodeans, stay long in AUDUSD in 1w ATM call, while 1w/1m credit call spreads for NZDUSD on both speculative as well as hedging grounds.