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“A Funny Old World” – The EM Carry Trade Collapse ‘Deja Vu, All Over Again’ From Citigroup | Zero Hedge
Spot the similarities.
From CitiFX Technicals: It’s a funny old World
- 1989-1991: Housing and savings and loan crisis: Fed eases aggressively as economy enters deep recession
- 1992-1994: Existing financial architecture in Europe (ERM) blows apart
- 1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998.By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.
- The carry trade and capital flow into emerging markets (Asia in particular) is center stage
- March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.
- April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50 . USDJPY collapse to 111 by June
- June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”
- August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the Equity market drops 22% (S&P)
History may not repeat…..but it sure RHYMES
Citi Warns The Greatest Monetary Experiment In The History Of The World Is Being Wound Down | Zero Hedge
As Citi’s Tom Fitzpatrick, a number of local market currencies are increasingly coming under pressure and look likely to fall even further. Whether this will turn into a dynamic as severe as 1997-1998 in unclear; however, at minimum Citi believes the “change in course” by the Fed in December (guided since May) has become a “game changer” for the EM World. The greatest monetary experiment in the history of the World is being wound down. In a globally interlinked economy it would be “naïve” to believe that the big beneficiaries of this “monetary excess” in recent years would be immune to the “punch bowl” no longer being refilled constantly.
Via Citi FX Technicals,
A look at some Subemerging currencies of interest.
There are a number of local market currencies that are increasingly coming under pressure and look likely to fall even further:
- In Latam we look at BRL,MXN,CLP and COP as well as the LACI (Latin America currency index)
- In Asia we look at PHP,KRW,SGD,IDR, TWD and MYR as well as the ADXY (Asia Dollar index)
- In CEEMA we look at TRY, ZAR and RUB
USDBRL long term chart continues to look ominous. (BRL is 33% of the LACI)
The uptrend in USDBRL that began off the double bottom formed in 2011(As the 2008 low held) has continued to develop steadily with a series of higher highs and higher lows.
Each new high (including the last one at 2.4550) has tended to result in a retracement back to test and hold the prior high.
If this trend is to continue (which we think it will) we would expect to see a successful break above that August 2013 high at 2.45 (possibly even within the next month) en route to a test of the major 2.62 resistance level. This is the major high from December 2008 and a decisive break above would complete the long term double bottom.
The target on such a development would be for a move towards 3.70 in the medium term
USDMXN starting to break out (MXN is 33% of the LACI)
USDMXN has clearly broken out of the triangle consolidation in place for most of the 2nd half of 2013.It did so while completing a bullish outside week last week after seeing strong support hold in recent months at the converged 55 and 200 week moving averages.(12.75-12.78)
It seems only a matter of time before pivotal resistance at 13.46-13.47 is likely to be tested.
A successful breach of this range should open up the way for further gains with little resistance of note evident before the downward sloping trend line at 14.09.
USDCLP now moving towards major resistance (CLP is 12% of the LACI)
Having broken through the 2011 highs at 535.75 USDCLP now looks set to rally further and test a whole range of resistance levels in the 551-556 range.
A decisive close above this range would suggest continued gains with next good resistance met around 622 (Downward sloping trend line from 2003 and 2008 peaks.
USDCOP attempting to complete a major double bottom (COP is 7% of the LACI)
A weekly close above the 1988 area would complete this formation and target a move as high as 2,200-2,225
Overall these 4 currencies make up 85% of the LACI (PEN is 5% and ARS 10%) suggesting further losses in this index are likely.
LACI (Latin America currency index) has really only 1 support level left
Having only been created in 2004 we now find that the only support level of note left in this index is the 2009 low at 89.39.(Around 3.4% below here)
We fully expect this level to be tested in the medium term and given the magnitude of moves possible in USDBRL, USDMXN, USDCLP and USDCOP new lifetime lows in this index are a distinct possibility.
USDKRW- Forming a base? (KRW is 13% of the ADXY)
For the 3rd time since 2011 USDKRW has held good support around 1,048. It now looks to be forming a double bottom with a neckline at 1,163. A break above here would target as high as 1,275.
Such a move, if seen, would complete an even bigger basing formation on a break of 1,208 that would suggest as high as 1,365-1,370
USDSGD testing good resistance (SGD is 10.27% of the ADXY)
Now testing good trend line and 200 week moving average resistance in the 1.27-1.28 area
A break through here would suggest extended gains towards horizontal resistance in the 1.3200-50 range.
A break above this latter range would open up the way for extended USD gains.
USDTWD: Breaking good resistance (TWD is 5.11% of the ADXY)
Has broken decisively above the 200 week moving average for the first time since Sept. 2009 and also completed a very clear inverted head and shoulders and horizontal trend line break (see insert).
The target for this move is at least 31.50
USDMYR: Re-testing the 2013 highs (MYR is 4.6% of the ADXY)
Having broken above good resistance around 3.21 (Double bottom neckline) USDMYR retraced back below and tested the 200 week moving average before rallying again.
It regained the 3.21 level and is now re-testing the 2013 high at 3.3377.
A break above here would put the double bottom well “back on track” and suggest a move to at least 3.48-3.50 again.
USDIDR: End of a 15 year consolidation? (IDR is 2.69% of the ADXY)
USDIDR looks simply to have been treading water for the past 15 years with signs growing that it may be in danger of break out.
A move above 13,000 would further support this view and suggest that the 1998 peak close to 17,000 could ultimately be tested again.
USDPHP breaking out (PHP is 1.64% of the ADXY)
Having broken out of the 8 year downtrend in May 2013 USDPHP has now completed a well-defined inverted head and shoulders that suggests a move towards 49.
In addition good resistance is met at 50.17 (2008 peak). A break through this latter level, if seen, would suggest continued gains to new all-time highs close to 60.
The ADXY has started to move lower again in recent weeks
So far it remains comfortably above pivotal support in the 113.60-114.00 area.
Only a break below this range would raise concerns about the potential for more extended losses in these Asian currencies.
While the currencies above only make up about 38% of this index the HKD and CNY together make up 49%. Therefore it is likely that moves in the charts above would be instrumental in determining the direction of the ADXY.
USDZAR looks like a long term breakout
We believe that USDZAR has now decisively broken out of a 12 year consolidation at the end of 2013.
We would expect a quick move up to test the 11.87 highs seen in 2008 and thereafter the 13.84 highs seen in 2001.
Ultimately we would not be surprised to see new all-time highs in the coming years.
USDTRY: The sky is the limit
Like USDZAR, we believe we have broken up out of a 12+ year consolidation. However looking at the pace of USDTRY prior to that we have no idea how far this can go, but it looks to be a long way.
As an initial level to watch, the inverted head and shoulders (see insert) targets the 2.60 area
USDRUB testing a breakout point
USDRUB is testing the 2012 high at 34.14 and a break above there suggests a move towards 36.50, the converging 2009 high and channel top
So overall in an environment of relative calm in the US Bond market in recent months the currencies above have continued to weaken albeit to different degrees. If this is as good as they can do with US Bond yields stable/drifting lower what does that suggest if and when bond yields start to push up again?
We have focused previously on how the FX markets have traded in a similar path to that seen in the late 1980’s/late 1990’s…
1989-1991: Savings and loan and housing crisis- USD index hits its low in 1992
1992-1994: Exchange rate mechanism crisis hits Europe and existing financial architecture comes apart. USD weakens in 1994 as bond yields turn off their lows.
1995: USD-Index starts to rise again as the USD and fixed income both look cheap
1997-1998: Structurally low rates in US and then Europe led to carry trades and money flowing into local markets in search for yield. During this time European currencies performed well on the back of the “convergence trade”. Peripheral European bond yields and spreads collapsed versus Germany into late 1998. Emerging markets (Asia and Russia in particular) got hit hard as money flowed out again.
We have no idea if this will turn into a dynamic as severe as 1997-1998 (This caused the Fed to back off its tightening bias in 1998 as EM markets got hit hard and LTCM went bankrupt as its convergence trades “blew up”. The US Equity market (S&P) fell over 20% in July-October 1998.)
However, at minimum we believe the “change in course” by the Fed in December (guided since May) has become a “game changer” for the EM World.
The greatest monetary experiment in the history of the World is being wound down.
In a globally interlinked economy it would be “naïve” to believe that the big beneficiaries of this “monetary excess” in recent years would be immune to the “punch bowl” no longer being refilled constantly.