Brent’s fall puts emerging market currencies in bad light

BETS against commoditylinked emerging currencies are on the rise again as crude prices fall to about $30 (R503) a barrel, but volatility remains well below the peaks of last year.

Brent crude’s renewed tumble this year has put commodity exporters’ currencies on course to extend last year’s losses and some, such as the rand and the Mexican peso, have hit record lows.

The Russian rouble is inching lower too, 4 percent off record lows struck towards the end of 2014, and these spotmarket losses are filtering into options markets where investors can try to hedge against further weakness.

“The oil price fall does pose a challenge for commodity exporters as the weakness isn’t fully priced into all the fiscal outlooks yet,” said Dominic Bunning, a strategist at HSBC.

He said most exporting countries had calculated their 2016 budgets using much higher oil prices – Russia’s for instance assumes $50 a barrel, while Saudi Arabia’s is thought to assume $40.

“Even if oil stabilises at these levels, fiscal assumptions will be impacted quite dramatically,” Bunning added.

Vols (implied volatility) on the rand have jumped to a threeweek high of 23.6 percent, while those on the Brazilian real last week hit two-and-a-half month highs before subsiding. Volatility is on the rise across asset classes, ranging from Wall Street’s main fear gauge of US blue-chip volatility to euro/dollar rates and US junk bonds.

Among developed currencies, the Canadian dollar has hit near 13-year lows and the Norwegian crown is near its lowest in more than a year. Implied vols on both are at multimonth peaks.

Gulf currencies, pegged to the dollar, are under pressure too, with the Saudi riyal setting record lows in the one-year forward market.

Risk reversals – a gauge of demand for options betting on a currency rising or falling – also show growing bias for dollar strength versus most emerging market currencies.

One-month risk reversals on the rouble show bias towards the dollar hit six-week highs at the end of last week, while dollar/rand reversals were at one-month highs.

Bearish bets on commodity currencies are however well off the peaks hit last August when the Chinese equity market slumped.

Panic-selling

Rouble vols, for instance, were around 70 early last year, while rand vols remain off four-year highs hit last month after the sudden removal of a finance minister. Brazilian vols rose to about 20 last week, but are nowhere near September’s levels around 30.

Indonesian rupiah vols inched up last week, but have slipped back to mid-December lows. “Vol markets have not reacted massively to the latest leg down in oil markets and that’s possibly because… positioning is already very long vol,” said Luis Costa, the head of CEEMEA FX and debt strategy at Citi.

There may also be a sense of many currencies being fairly valued after last year’s 2030 percent falls versus the dollar. The rouble for instance has shed 2.2 percent so far this year, far less than Brent’s 12 percent plunge. There is also little sign of panic-selling among the public – a factor that influenced central bank intervention in 2014. “There are arguments why the weakness may not be as acute as last year and that comes down to valuations,” Bunning said. – Reuters