Turning 'tactically bearish' on EMEA currencies
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Emerging Markets

Turning 'tactically bearish' on EMEA currencies

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One emerging markets strategist has turned “tactically bearish” on EMEA foreign exchange, although only for the short term

The strategist, Societe Generale’s Benoit Anne, said the EMEA region as a whole “remains more exposed to renewed concerns over the eurozone, especially in Central Europe.”

“Our bias is therefore to turn tactically bearish on EMEA FX, while recognizing that the medium-term outlook remains considerably stronger,” Anne wrote in his weekly outlook for emerging markets.

But he sees some differentiation in the region, with the Turkish lira (TRY) “now on its way back to the outperforming side after the rating upgrade to investment grade.”

However, investors should keep an eye on the correlation between currencies in emerging markets and the euro, “given the dark clouds on the short-term horizon in Europe.”

European Central Bank (ECB) President Mario Draghi failed to dispel market fears of a steeper-than-predicted downturn in the eurozone, as he admitted on Thursday that the economy will remain weak.

“We do not claim that contagion risks will reappear as forcefully as they did in late 2011, but at the same time, eurozone-related headline risks have clearly not disappeared, on the contrary,” Anne said.


The Czech koruna (CZK), the Israeli shekel (ILS) and the Russian ruble (RUB)“look particularly vulnerable to downward pressures on the euro,” according to Anne. Another correlation risk that he is watching and which is “likely to be a major driver of the near-term outlook” is between the US stock market and emerging currencies.

The correlation risks in this direction are “particularly severe” for the Mexican peso (MXN), the Chilean peso (CLP), the Russian ruble (RUB), the Polish zloty (PLN) and the Indian rupee (INR).

The Chinese yuan (CNY), the Taiwanese dollar (TWD), the Romanian leu (RON) and the Turkish lira (TRY) “appear to be immune to the S&P’s correction risks from a correlation perspective,” Anne said.

He said the liquidity rallyhad been losing its steam as risk sentiment had “taken a bad hit.”

The results of the US election “may trigger a correction in the US equity market,” and this could hurt investors’ appetite for risky assets going into the end of the year, he said.

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