Sunday, July 20, 2008

Emerging Markets

Friday was a very interesting day in the Emerging Market world. I will take you through a few of the Countries of interest.

Argentina. Many of my readers, will remember that I have had a position in this currency for some time. It has been a roller coaster ride that I am unable to get away from because of a its high yield. Since March 2008 there has been an on again off again (mostly on) strike being held by the farmers due to increased tariffs imposed by the Government. These strikes has caused interest rates to soar, and in response the Government has been intervening in the spot market to punish speculators. Rates have moved to almost 20% in the 12 mth sector. On Friday the tariff was revoked.

Argentina's President Cristina Fernandez de Kirchner revoked a decree that increased some agriculture export taxes after she failed to win support for the levy from the country's Congress.

The country will resume the level of taxes on farm exports that existed before the measure took place in March, Cabinet Chief Alberto Fernandez said today in a press conference in Buenos Aires.

This is good news for the country as it shows that the Government, long thought of as not listening to the people, has bent to the will of the people. The curve immediately reacted by moving lower, considerable lower. Since this all occurred late on Friday afternoon, the local spot market was closed so I am not sure of what the reaction will be, but I think it will be to move higher. Remember, the Government drove the spot lower in response to higher rates, with rates coming back off why not let market forces dictate where it should go? It would also more closely reflect where it should be to begin with. Inflation is exceptionally high (in part due to the strike)and a weaker currency is logical in that environment. This is just an opinion and reflects my current trading position (long Usd/Ars spot and Short Usd/Ars outrite ...over bought dollars in the spot)so please keep that in mind.

Mexico. On Friday the raised rates 25bp to 8%. Interestingly it was announced on the Banco de Mexico website 30 minutes before the published time. Speculation was the someone at the CB made a mistake and "pressed the button to early". Anyway, I was some what surprised by the move (although it was widely expected in the market). I though they would wait till next month as growth in Mexico is slowing. Inflation of course is moving higher and they choose one evil over another. This is the opposite tactic of the Fed. They have basically said no rate rises until the economy stabilizes, although the Fed Stern does not seem to agree.

The Federal Reserve shouldn't wait for housing and financial markets to stabilize before it begins raising interest rates, central bank policy maker Gary Stern said.

``We're pretty well-positioned for the downside risks we might encounter from here,'' Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview yesterday. ``I worry a little bit more about the prospects for inflation.''

Interest rate differential should continue to widen here and look for Usd/Mxn to test the 10.000 level in the very near future.

Colombia and Chile
. Both of these currencies weakened against the dollar on Friday. I am not comfortable sitting short dollars against Colombia at these levels and am very glad that I will be fixing out of all my shorts on Monday. Usd/Clp seems range bound with a weakening bias as long as commodity prices continue to move lower (specifically Copper) as I think they will.

Brazil. This currency has been grinding lower but not as aggressively as I would like. I continue to sit small short but will not get "married" to the position.
Interest rate differentials should continue to widen as Brazil is clearly in a tightening environment.

As always I am staying away from the Euro, but if a gun was to my head I would sell it, as crude is coming off and I think alot of bad news is already built into the U.S. economy.

Good Luck and Good Currency Trading

Labels: ,


Blogger euarte said...

I was interested on the comment that the R$ was grinding lower. Against the US$? Not yet anyway. The dollar continues to go lower and lower although at a slightly lower speed. But lower is lower.

9:09 AM  
Blogger Banker said...

Sorry I meant that the dollar was grinding lower against the real. I agree lower is lower, but definitly at a slower speed then a year ago. My point being, this trade is not the "slam dunk" it was previously.

9:20 AM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home