Good news about a plan to rescue Spain’s troubled banks could boost currencies in EMEA, which are well positioned to outperform other regions in the near term, according to Societe Generale strategist Benoit Anne.
The People’s Party of Spain’s Prime Minister Mariano Rajoy won regional elections in Galicia on Sunday in what a spokesman for the party said was proof of support for the austerity measures taken to bring the country’s debt crisis under control.
Some analysts and investors had said Rajoy would ask for a bailout from the eurozone’s rescue fund, the European Stability Mechanism (ESM) after the elections, to allow the European Central Bank (ECB) to buy Spanish bonds under its new bond-buying programme.
But Rajoy said as early as last Friday that he had not decided whether Spain would ask for a bailout or not. Yields on 10-year Spanish bonds rose slightly to 5.41% on Monday according to Reuters data, still well below the 7% level which forced Greece, Portugal and Ireland to request bailouts.
“The major focus these days has been on Spain and some good news on this front may trigger a relief rally in the period ahead,” Anne said.
“The ECB has done a great job towards reducing contagion risks. On this basis, we are bullish on the PLN, as well as the RUB.”
OUTLOOK UNCERTAIN
HSBC’s senior emerging markets strategist Clyde Wardle says there is value in the PLN in the medium term but the near-term outlook is uncertain as a recent set of data showing a rapid economic deterioration might prompt a rapid interest rate cut.
He sees depreciation pressure on the ruble before the end of the year because net capital outflows have remained “significant” and the current accounts “gets weaker” in the fourth quarter on seasonal grounds. In EMEA, the Israeli shekel (ILS) looks attractive to Wardle, who believes that its depreciation “is overdone.”
“The stabilization of the current account balance and the adoption of a neutral stance by the central bank offer some support to the ILS,” he said.
LATIN AMERICA
Latin American currencies are likely to underperform “given the magnitude of intervention risks prevailing in the region,” with the Brazilian real (BRL) stuck within a narrow trading range as the authorities have been “very active in the market,” according to Anne.
“The situation is even worse in Chile, where the Chilean peso (CLP) now trades near a level that may make the central bank uncomfortable about currency devaluation,” he said.
In the region, only the Mexican peso (MXN) looks cheap, according to Anne.
Wardle expects the Mexican peso to strengthen. “We like MXN medium term on cheap valuations, a positive outlook for structural reforms, solid macro outlook and low intervention risks,” he said.
But he warned that the currency was exposed to profit-taking or risk aversion on external shocks as positioning in local bond and foreign exchange markets was crowded.
Wardle believes the Brazilian real still has attractive interest rate differentials and says the increase in long BRL positions in the last month “reflects interest in carry trades is back.”
The Peruvian sol (PEN) is another Latin American currency that looks attractive “based on strong growth, healthy inflows and ongoing de-dollarization of the economy” but authorities continue their efforts to limit the currency’s appreciation, he said.
ASIAN CURRENCIES
In Asia, it is “too soon to turn aggressively bullish” on foreign exchange because of uncertainty over China’s growth story, according to Anne. The Indian rupee (INR) has been “by far the best performer in the region” following the government’s announcements on reforms, he noted.
Wardle warns that there are implementation risks and political obstacles to the reforms that seek to address India’s twin deficits and boost investor confidence, and recommends a neutral position on the INR.
His “least favourite currency in Asia” is the Indonesian rupiah (IDR), as the deterioration in Indonesia’s current account deficit is likely to persist because of weak commodity prices and recent comments by the central bank governor that the currency should weaken.
The Korean won (KRW), Malaysian ringgit (MYR), Philippine peso (PHP), Singapore dollar (SGD), new Taiwan dollar (TWD), Thai baht (THB) and Vietnamese dong (VND) are all seen stronger by HSBC analysts.
Among developed market currencies, Morten Helt, senior analyst at Danske bank, recommend long positions in the Swiss franc (CHF), Australian dollar (AUD) and the euro (EUR) and shorting the Swedish krona (SEK), the New Zealand dollar (NZD) and the Norwegian krone (NOK).