Asian Currencies Setting Up For a Big Fall

Asian currency markets are looking rather precarious. They are all sitting at key levels. Once these levels are breached significant moves will follow taking them to levels last seen during the height of the GFC! Although the USD has strengthened against most currencies over the last few months, this strength has barely touched the surface from a long term perspective.

Below is the JPM Asian Dollar Index (Asian currencies against the USD). Note how this index has been moving in a trading range over the last 4 years, also note how that trading range has been compressing. In technical terms this index is reaching a point of resolution and dramatic moves occur once the point of resolution is breached. In the case of the index below this will be a close below the 114 level.

If the 114 level is breached how far would the index fall? Well I would say down to at least the 105 level - which is very significant.





The most dangerous thing in finance is the thing that never moves until it moves. What is of concern is that most traders in the market haven't experienced an emerging market currency crisis and are completely unaware of the magnitude to which emerging market currencies can move particularly after long periods of relative stability. I didn't experience the Mexican peso, or "Tequila" crisis (although I do recall the peso jokes), however, I did experience the Asian Tiger and LTCM crisis in the late 1990s. I assure you I will never forget those times. What did the Asian Dollar Index do during this time? Well take a look below:



I'm not going to sit here and do a "drama queen" thing and make wild unaccountable predictions along the lines that we are starring at another currency crisis which will rival that of the Asian Tiger crisis in 1997. It isn't hard to spot a big move coming, but one never knows just how "big" that move will be.


What is the best way to position for a big move in Asian currencies? I think bearish positions on the Singapore Dollar namely via long term call options on the USD/SGD. Note how the Singapore dollar has been hammering out a long term bottom and appears so close to breaking above the key 1.29 level, also note the trading range compression (the SGD is part of the Asian Dollar Index).



The Singapore Dollar is very liquid and also has a very good option market attached to it. What's more long term options are very cheap and aren't pricing in any substantial move. Below is an index of implied volatility on long term options on the USD/SGD (think of it as the "VIX" of the Singapore Dollar).


The beauty of long term FX options is that you don't have to worry about volatility prematurely taking you out of a trade (those irritating stop outs). Rather its is a race against time, but if time is cheap who cares about timing the market!