FxWirePro: Spotlight on intricacies of BRICS FX universe and trade radar – Episode 1

BRL: For the first time since 2016 the USD-BRL exchange rate has overcome the 4.00 mark. Concerns that one of the more extreme candidates will win the presidential elections in October have increased on the market. The outcome of the elections is still very difficult to predict, partly because of the candidacy of former President Luiz Inacio Lula da Silva. 

On account of his conviction for corruption, he will probably not be able to stand at all, nevertheless he has increased his lead in the polls recently. Uncertainty about the political future of the country is high and the BRL therefore remains under depreciation pressure. 

Trade tips: Contemplating above factors, as the underlying USDBRL pair has constantly been spiking since January from the lows of 3.1928 levels to the current 4.1052 levels, on hedging grounds, maintain active longs in 1m USDBRL forward contracts with a view to arresting upside risks.

RUB:Fresh US measures catch renewed longs in RUB off-sides. Following the declaration of more U.S. restrictions in response to the chemical nerve-agent attack in the UK, the ruble has weakened more than 6% to its lowest level in two years. The EMEA EM FX strategy teams most closed their EM OW last Friday ahead of these developments, but have noted that the ruble has the second longest net positioning score among liquid EM per the JPM EM client survey data, and thus leaves ruble exposed to substantial unwinding. 

Trade tips: 06-Sep-18 USDRUB 1x1 put
spread (61.00/59.00), spot reference: 67.305 levels (0.92%).

INR: The near record low for the Indian rupee (INR) continues to grab the headline attention. USDINR managed to ease back slightly last Friday to 69.740 levels. The softer USD tone and stabilization efforts from China could see it ease further today. However, the real headline grabber this week could be a blowout Q2 GDP report due this Friday. It is expected to remain robust around 7.5-7.7% yoy following 7.7 in Q1. 

This is above the estimated potential growth pace of around 7% and could raise calls for RBI to stick to its hiking path. We are of the view that RBI is likely to hike at least one more time this year by 25bp to 6.75% in the remaining two meetings this year after the 50bp so far this year. The main reason is due to elevated core inflation (excluding food and energy) which is running above 6% yoy for the past three months to July 2018. 

Even though RBI targets the headline CPI at 2-6%, the fact that core inflation is above this range should nudge them to be nervous, particularly given the supportive growth backdrop. The positive growth outlook was also reinforced by Moody’s last week as it expects strong urban and rural demand and improved industrial activity to remain key growth drivers. 

For now, USDINR may find some reprieve from the stronger CNY, softer USD, and robust Q2 GDP report this week. 

Trade tips: What does it mean for USDINR? Rising expectations of two more hikes this year could provide some support for the battered INR which has depreciated by nearly 7% vs USD year-to-date and the weakest among Asian currencies. However, oil prices remain the key driving factor near term and if they consolidate or correct further, this should also see USDINR ease back to the lower end of the 68-69 range.

Hence, trading grounds one can buy 1m ATM strangles to capitalize on the range bounded trend and fetch certain yields, one could maintain 1% OTM strikes having narrowed expiration on these contracts. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -17 levels (which is neutral), while articulating at (10:02 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex