Monday, July 28, 2008

Emerging Markets

Friday was once again an interesting day in Emerging Markets, lets go through each country.

Colombia, raised rates unexpectedly on Friday. The reason cited was inflation. Colombia will probably miss its inflation target for the third consecutive year and as such the CB reacted.

``Inflation has had a higher than expected increase,'' said Finance Minister Oscar Ivan Zuluaga at the central bank in Bogota after the announcement.

This could be a problem for the currency, as it will add to its strength (interest rate differential widening). The CB has been under tremendous pressure of late to stop the appreciation of the currency. That is one of the reasons they instituted the daily currency purchases earlier this year.

Mexico. The Central Bank announced the suspension of dollar sales, beginning Aug 1. This caused the currency to weaken the most in almost 6 weeks. This followed the announcement that the Government would purchase 8 billion dollars in reserves from Banco De Mexico. With the market looking to challenge the 10.00 level (I have been calling for the for a while) there were ample shorts to squeeze, which is exactly what happened. There was also talk of major "knock-outs" in the options market at the 10.00 level. Now what from here....

The announcement ``led to a sharp move in the peso,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. ``We're not expecting a big drop in the coming days as the spread with U.S. rates keeps the peso firm.''

Interest Rate differential comes into play once again. I tend to agree as carry is king (in my book at least).

Argentina, posted the largest trade surplus since 2001. This on the back of the farmers strike. Rates have settled in at around the 15% level in the 12 mths, and the currency has strengthened slightly in recent days (3.0150/00). I still like my position which is long a few (not many) dollars in spot and short dollars along the curve. I benefit from positive carry while guarding against a meltdown of the currency.

Brazil. The calmest currency of all. The stock market has been struggling of late and the yield curve is recting strange. I think there are opportunites to be had in the differentials with dollars. Of late they have been narrowing, I do not agree with that. I think there is an opportnity to buy the curve looking for it to widen out. Rates will continue to go higher in Brazil, here in the States we will stay flat. As for the currency, I do not have a strong view. The currency has strengthed for the past 4 years, I guess ride the trend for now (sorry I do not have any conviction here).

Good Luck and Good Currency Trading.

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