How To Trade Foreign Vulnerabilities In FX?
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While EM is now in a better position compared to 2013 when the taper tantrum yields back up caused EM assets to decline universally, there are exceptions. South Africa still runs a current account (CA) deficit of 5% of GDP and here political uncertainties have not eased. Higher US real rates have undermined precious metal prices. ZAR is our preferred EM FX short, tightly followed by the COP. Here too it is the CA deficit that matters when global yields rise. In addition, oil markets should soon fall should our assumption of a pre-emptive US rate hike debate undermine the US economic outlook further.
We expect current account and foreign liability currencies to weaken. In DM these are AUD, NZD and the CAD. We like trading these shorts against the CHF and the EUR.
The USD may rally 3% from here, but we think it is too early to assume the long-term USD rally to resume from here. Getting to that conclusion requires the Fed acting in line with rising inflation expectations.
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