Market Analysis

Turkish Delight in the Emerging Market Space??

In the absence of a material steepening of the US yield curve, it may well be that the allure of higher yields from Emerging Market currencies continues to attract. Dutch bank ING had this in mind on Monday. “With yields in core markets contained for the time being – and the likelihood of that continuing this week – we would expect the high yielders to again be in demand,” ING wrote. “Traded volatility levels continue to decline and investors are faced with a choice of in which high yielders to invest. RUB [USDRUB] had been popular, but now faces challenges with low oil prices and potentially broadening US sanctions. ZAR [USDZAR]  looks to be trading on thin ice and could easily hand back its gains quickly. So ING has another suggestion. “In the EMEA space, our preference for carry would be [the Turkish lira]  [USDTRY, TRYJPY].”

The Dutch bank expects the Central Bank of Turkey “to be slow in cutting rates, meaning effective funding rates may stay near 12 percent, and that USD/TRY will continue to press 3.50 support. While a move to 3.40 may be too much for USD/TRY, we still look for TRY to out-perform the forwards and as mentioned previously, see value in long TRY/JPY strategies.” Traders will have their own opinions but perhaps the real issue is that banks are already turning their minds to how to trade an environment where developed market yields, particularly US yields, remain contained even in the face of actual or flagged monetary policy tightening.

Written by Neal Kimberley, External Currency Analyst.