Emerging Markets Briefer

Dollar−bloc currencies back in favour

Mon, Aug 18 2008, 07:05 GMT
by Danske Research EmergingMarkets Team

Danske Bank A/S


USD rebound to continue

  • With the weakness in European economies becoming more pronounced recently, the upward trend in EUR/USD has been broken. Even though the short-term movement might be a bit exaggerated, the EUR/USD bullish sentiment has probably shifted. We therefore expect EUR/USD to continue to decline over the coming 12 months towards EUR/USD 1.40.
  • Further dollar strength would be positive for the EM currencies with the highest positive correlations with the dollar. We believe this will put “dollar-bloc” EM currencies with considerable carry back in favour.

Favours LATAM and EM Asia

  • The overall conclusion is that if one wants to be positioned in EM for a further move down in EUR/USD, one should, broadly speaking, be long LATAM and Emerging Asia and short CEE.
  • Our favourite long is MXN because of its strong USD correlation and carry. CZE is our favourite short. CZE has strengthened significantly during the past year. However, the recent rate cut by the Czech central bank underlines that this trend is finally turning.
  • In Asia, IDR and TWD are our favourites.

Published on  Mon, Aug 18 2008, 07:05 GMT

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