‘Don’t believe everything you read in the papers!’
- no matter how archaic and cliché the preceding quote may be, it’s still hard to dismiss its ability to drop a little bit of knowledge on us at times. Replacing the term ‘papers’ with ‘media’, however, better suits the current environment which has seen the rise of the machines (smartphones, I-pads, & paper thin labtops) lead to a gradual but undeniable decline of print as a prominent channel of media distribution. In turn, this is likely to have resulted in broad under-utilization of printing presses worldwide; although such declines may be fully absorbed by central bank over-utilization globally.
Moving forward, the outlook for emerging market currencies may very well depend on the magnitude of printing press usage by central banks of advanced economies. At the moment, the ECB is the only Euro-area institution with a balance sheet large enough to absorb further EZ debt contagion but the central bank seems to have joined the FED in a ‘wait and see’ approach regarding further monetary policy easing.
While both central banks take a lax approach towards additional lax policy measures, risk assets have remained under pressure as EU policymakers succeed only in agreeing to disagree. In EM FX, the broader reaction to rising Euro-zone uncertainty has been an exodus out of emerging market currencies as ‘risky’ assets are shunned for those deemed safe.
At the moment, we think continued EZ uncertainty may see EM outflows continue as 2012 gets underway. However, we also think a launch of large-scale asset purchase programs by the ECB and/or FED may be necessary in the latter part of the 1Q 2012 and would likely see flows flood back into EM FX as was the case in 2009. A potential influx back into EM FX may be led by currencies hit hardest during the preceding bout of risk aversion and also belonging to EMEs (Emerging Market Economies) having relatively firm strong domestic fundamentals or high beta to risk.
Overall, we think near term strength in EM FX may present decent short value until further ECB and/or FED policy accommodation materializes, in turn leading to potential long EM FX opportunities with relative value possibly favoring the following emerging market currencies:
EMEA: TURKEY – FIRMING GROWTH, INFLATION, & LIRA
MACRO-VIEW: Economic data suggests Turkey on schedule for a soft landing
Consumer prices increased +9.48% (YoY) in November, significantly higher than the CBT’s 5% target.
Improving current account imbalances (October printed -4.2bln vs. expected -4.6bln and prior month’s -6.4bln), firm growth (3Q GDP was 8.2% vs. expected 6.3%), and declining unemployment (8.8% vs. expected 9.5% and prior 9.2%) evidence relatively sound domestic conditions in Turkey.
On December 22nd (0700ET), the CBT will announce its benchmark repo rate with the survey of Bloomberg economists broadly expecting no change at 5.75%.
We think the CBT will maintain its current stance of unconventional policy measures which has seen TRY (Turkish Lira) outperform most EM currencies since the broad-based risk sell-off beginning Halloween Day.
FX-VIEW: Scope for EUR/TRY downside?
While our overall outlook for EM FX is centered on continued weakness for emerging market currencies in Q1 2012, the Turkish Lira is unique in that we think long TRY (lira) positioning versus EUR (short EUR/TRY) may provide better relative value even within an environment of continuing risk aversion which may be exacerbated if Euro-area debt concerns begin to abate.
Diverging interest rate expectations on the back of the ECB’s recent shift to easier monetary policy in contrast to the CBT’s tightening stance has resulted in positive rollover value for EUR/TRY shorts.
High inflation alongside firm growth despite deteriorating external conditions affords the CBT (Turkey’s central bank) to maintain its hawkish policy stance.
Possibility of large scale asset purchases by the ECB widens the scope for already diverging monetary policy directions with the CBT as well as the scope for further EUR/TRY downside.
L/T Strategy Outlook: 2.5100 has effectively capped EUR/TRY upside on a daily close basis since the CBT imposed its unorthodox policy tightening measures in late October and may provide decent longer term EUR/TRY short value on positive carry interest alongside the potential for extended euro downside as previously noted in the EM FX Insider on 25 October 2011.
The main risk to this view may come from the real possibility for Europe’s debt crisis to deteriorate at a more rapid pace for an extended period of time. 
EMEA: SOUTH AFRICA – RISING INFLATION BUT FALLING GROWTH & RAND
MACRO-VIEW: Stuck between rising inflation and stalling domestic growth…
October CPI rose to 6.1%, above the upper end of the SARB’s (South Africa’s central bank) target range.
Manufacturing Production fell -3.6% in October versus broad market expectations for a +0.3% increase.
South Africa’s current account deficit worsened to -3.8% of GDP (YoY) in October from -3.3% in September.
Geographic distance may shield South Africa from Euro-area deleveraging risks.
FX-VIEW: Elevator down & up?
High ZAR (South African Rand) beta to overall risk direction & commodities widens the scope for sharp ZAR downside during bouts of risk aversion but…
Also widens the scope for sharp ZAR upside for risk on periods.
USD/ZAR has posted multiple monthly closes above the key 8.0000 big figure to current levels around 8.3800.
0.764 fib symmetry? – USD/ZAR rallied to the 76.4% retracement of the 2001 highs to 2004 lows before reversing lower.
0.764 fib symmetry? – USD/ZAR sees the 76.4% retracement of the 2008 highs to 2011 lows converges with triangle resistance (see chart below) around 10.6025.
0.764 fib symmetry? – Recent macro-risks have resulted in shortened cycles from recession to recovery which may see stalling global growth lift USD/ZAR towards a test of the 0.764% retracement of its previous primary downtrend around the 10.6000/6025 level but may also see a potential ensuing risk recovery see ZAR strength drive USD/ZAR back down to single digit big figure territory.
L/T Strategy Outlook: We think any remaining ZAR strength versus USD (USD/ZAR downside) to the key daily pivot around 7.8000 may provide decent long term value for USD/ZAR longs targeting a potential run higher to well below the key 76.4% retracement of the 2008 highs to 2011 lows at around 9.1500. Potential stops below the key 7.5000 figure at around 7.3100 may provide a reward: risk ratio better than 3:1.
The main risk to this view may come from a more expedient and sharp resolution to Europe’s debt crisis.