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FxWirePro: Spotlight on BRICS FX space – Episode 1

EM assets saw a limited relief rally in July which has stalled into August as US-China trade tensions continue and some idiosyncratic EM situations (Turkey, Russia) have worsened. 

While Russian industrial output growth advanced to better-than-forecasted 3.9% YoY in July vs consensus expectation of 2.6% increase. In seasonally and workday adjusted terms, output increased by 0.3% MoM after declining by 0.5% the previous month. 

Much of the output increase was driven by the OPEC agreement for slightly higher production every month, but that aside as well, decent momentum was visible in metals, oil refining and cars. This probably had to do with making up for the decline when US sanctions were earlier announced. 

If calming down of sanctions uncertainty was indeed responsible, then the acceleration will not last long: activity could slip once more in August as fresh sanctions have triggered uncertainty. 

In conclusion, political risk premium is likely to remain high and the potential for sustained economic upswing rather limited. We forecast 1.3% GDP growth this year, which is below consensus.

We uphold staying short USDCAD through a low-cost RKO: The USDCAD put RKO was originally conceived as a low-cost option to gain exposure to what seemed like a decent chance of a near-term breakthrough in NAFTA negotiations.

Now what seems most likely is that the option will expire worthless, particularly after the latest developments in the US Trade policy which seemingly swung the tone of NAFTA negotiations back to an antagonistic one where Trump has once again publically hinted about the possibility of pulling out.

Trade tips: Buy 3M USDCAD 25D call vs sell USDRUB 25D call, in 1.8:1 vega. Oil hedged EM – DM vol compression RV with NAFTA edge. 

CNY: CNY: Again, there is an invisible hand behind the CNY. When USDCNY was heading towards the 7.0 hurdle yesterday, the market was expecting the PBoC would defend this level as it did in the past. And the PBoC delivered, since USDCNY is now back below 6.90 after a quick down move. 

Otherwise the CNY is likely to experience another bumpy journey, given the backdrop of overall EM weakness. At this conjunction, the market is holding the breath to see the next steps from PBoC. Today’s USDCNY fixing came in well below our and market expectations. 

At first glance, this illustrates an intension to steer a stable currency, which triggered speculations that the “counter-cyclical factor” has been added into the fixing again. 

Certainly, a lower-than-expected fixing rate (i.e. CNY stronger) would somehow manage the market expectations. There is another piece of news that Wang Shouwen, China’s vice Commerce Minister, will visit the US for trade talks in late August, which has given CNY a boost as seemingly China and US have restarted the negotiation. 

Trade tips: Buy USDCNY 2M ATM straddle, execute strategy by buying at-the-money call and at-the-money put. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is displaying shy above -27 levels (bearish), while articulating (at 11:04 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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