Volatility in Emerging Markets Remains

Forex News and Events

Trading in fx emerging markets remains jittery heading into the weekend. In addition, low participation and thin liquidity conditions are amplifing forex disorderly markets. The massive volatility spike marked the lira markets on week to December 19th. Both internal and external factors have been responsible for the volatility pick-up in TRY. The Turkish journalist arrests, the oil race to the bottom, the heavy RUB sell-off, the surprise CBT rate intervention and the FOMC jitters contributed to USD/TRY’s rally to record high of 2.4146 on December 16th. The 1-month implied volatility spiked to 15% for the first time since March. EUR/TRY tested 2.9488 / 3.00 resistance zone (Fib 38.2% on January-November ease / psychological level). The sell-off in Turkish bonds recorded on week to December 12th (USD 718mn) seemingly accelerated, pushing sovereign yields higher across the curve with higher front-end impact due to mounting anxieties. The interbank lending hit the Central Bank’s upper corridor of 11.25%. Momentum trading strategies continue to outperform

Oil drop couldn’t help

The significant drop in oil prices did not profit to TRY, although lower energy costs is favorable for narrowing current account deficit, and lower inflation. The reverse carry flows have significantly depressed the appetite for high yielders. Especially given that the rate differential should also compensate for above 9% inflation in Turkish holdings.

The 3-month cross currency basis in TRY verse EUR and USD rebounded sharply alongside with the FX volatilities, confirming that the appetite in rate spread is now being fully offset by TRY-negative vols. We believe that the volatile environment will ease toward the year end given the cautious Fed stand before rate normalization and the ECB preparing for a full-blown QE.

Turkey gives verdict on December 24th

The Central Bank of Turkey will give policy verdict on December 24th. On December 12th, the President Erdogan said the rates should fall further to sustain the economic recovery. Despite the recent turmoil in the markets, we believe that the political pressures will keep the CBT away from any rate action before the year end. The CBT should feel more comfortable using unconventional tools to temper FX volatilities at this point. The accompanying statement should however remain strictly hawkish.

Russia Crisis

So what do you do when investors' confidence has drained and your currency has collapsed? If you're Russian president Putin, you hold a town hall style meeting where an ex-KGB agent reassures everyone that everything is under control. When the smoke cleared and all the "questions" were answered, traders were left with no major measures with which to address the current crisis. Just a short recap of the events surrounding the ruble collapse. The Ruble has been under selling pressure as oil prices sank. This forced the Russian central bank to remove the managed float which had been keeping the ruble price action within a controlled fall. Things really started to get bad when the central bank forecasted that oil below $60 would send Russia into a severe recession. Rapidly declining oil prices and sanction induced lack of foreign reserves, created a mad dash liquidation out of Rubles. In a desperate attempt, the Central bank of Russia unexpectedly hiked the main interest rate from 10.5% to 17%. A decision which provided stability for only a few hours before traders panicked causing the USDRUB to peak at 79.16 (-43% in three-months). Since Tuesday's rout, the Ruble has recovered to 60 verse the USD.

So far the only solutions have been trivial, side stepping the real issues. Exporters have in-theory agreed to limit foreign reserves to Oct 1st level and Russian central bank First Deputy Governor Ksenia Yudayeva said they were prepared to pump 1trn rubles into domestic banks to to ensure financial stability. While buzz of more radical options, such as harsh capital controls are making the rounds. The Russian economy is stagnating, illustrated by weak industrial production data and slow retail sales, while investments by domestic companies are falling as western sanctions begin to bite (forecast contraction of -4.5 percent in 2015). There are additional worries that heavy leverage companies may not be able to repay debts and that there are possible rating downgrades on the horizon. On the political front we are skeptical that these events actually poise a threat to President Vladimir Putin's popularity. As with any politician, stability and economic growth is critical for control, yet Putin has framed the current events as an attack on Russia by the west not a failure or misguidance of his leadership. This is yet another media war which Putin has won again.