May 21

Dollar Bulls Run for Flags

The Dollar has been stronger in recent sessions with the bulk of strength seen against higher yielding currencies. The greenback has traded sideways against the EUR and GBP, and lost ground against the Yen. US Yields remain near recent lows as European periphery spreads continue to widen. Stocks have weakened in what looks like profit taking on all the crowded trades: Stocks, periphery assets and high yielding currencies. The shunned assets have been the winners, namely developed market bonds and the Japanese Yen. As chatter increases around how the Fed will lift off rates, US yields should get a boost which will give the USD a tailwind. Several USD pairs now show similar bullish flag set ups that should be kept in mind.

CAD: The Short Canadian Dollar trade was popular in January and February as the Bank of Canada shifted to a more dovish stance. Governor Poloz has recently said that rate cuts are “not off the table” and data out of Canada has been mixed. In my opinion the Canadian Dollar has benefited from a North American halo effect, MXN and CAD have not sold off in recent days as much as other high yielding currencies have. Investors may see Canada as benefiting from US outperformance. It remains to be seen whether Poloz will lean against this recent relative strength of CAD. The main driver of USDCAD upside will be based on the idea that the Fed will hike rates before the BoC does, bringing their respective overnight rates to similar levels. Canadian retail sales are out May 22nd, with CPI numbers arriving May 23rd.


TRY: The Turkish Lira has been the centerpiece of the carry trade resurgence given its January rate hike from 7.75% to 12%. Last week’s devastating mine fire accident has sparked off rampant protests across the nation as citizens express discontent with the government of Recep Tayyip Erdogan. The controversial President faces his first “legitimate” election in August. There has been speculation recently that the Turkish central bank is facing intrusive government pressure to cut interest rates this week (May 22), this decision will set the tone going forward for the pair.


ZAR: The South African rand has also been a beneficiary of the low volatility in interest rates. Yield seeking money has flowed into ZAR even as platinum miner strikes hamper exports and sentiment indicators drop to recent lows. Retail sales have also been on the decline in what is apparently becoming a broad economic slowdown in Africa’s now second largest economy. HSBC Manufacturing PMI has declined sharply over the last two months. The April print showed activity in contraction territory for the the first time in 12 months at 49.4.


All three of these currencies are in the line of fire of slowing Chinese growth, additionally they all carry idiosyncratic risks as well. Turkey and South Africa with their current account deficits seem particularly vulnerable to a continuation of rising yields in the United States. Overall, higher yielding currencies got a boost in the wake of Draghi’s nudge towards easing, but there will still likely be a net reduction of global easing over the next six months as the Fed tapers, and money market rates rise in The US and UK. These three currencies may be good candidates to bet against if you are willing to pay the carry.