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Following the CBRT’s decision to hike the Late Liquidity Window (LLW) by 50bp to 12.25%, we would like to initiate longs in TRYZAR (entry: 3.6950; target: 3.90) and uphold shorts in USDTRY. The central bank decision was in contrast to consensus expectations of all rates being left unchanged. With the 50bp hike in LLW to 12.25%, the CBRT action injected a significant dose of confidence into the market.
The commodity complex has been under pressure in recent days and more broadly in a downtrend over the past couple of months (Bloomberg commodity index is down 8% from mid-Feb).
The 5% plunge in crude oil in the past 24 hours, and weaker copper and iron ore prices this week, has hurt some selected currencies.
The RUB, MXN, and ZAR have all suffered but overall EM currencies have been fairly well behaved. In the past, these types of moves in commodities would have been negative for exporters and importers alike and the sell-off in commodity-sensitive currencies much larger.
Better fundamentals, supportive external conditions, and appetite for carrying have helped currencies weather the commodity storm so far.
As long as commodity prices stabilize, risk-sentiment doesn’t wobble further, and global growth conditions remain supportive, a sell-off in EM FX provides a buying opportunity. Indeed, this is what we are hoping for given our current portfolio construction.
We are long high yielders (such as MXN, ZAR, INR, and TRY), paid rates in Poland but long bonds in South Africa, and positioned for steeper curves (Mexico, China, and Turkey).
In the past couple of days, the new additions to our portfolio have been a 1s5s steepener in Turkey, short USDTRY, and paying 10yr IRS in Poland.
The RUB is off 5% from its strongest point in late April. At these levels, carry should deliver over the medium term but we would be more comfortable with long exposure if there was a larger position wash-out that saw USDRUB around 60-62 (oil-RUB fair value is around 64).
