More risk off in Asia as the Yen and US dollar rally. USD/JPY was trading at 98.86 as of 3:52 AM GMT, after closing at 99.40 in New York. EUR/USD was also dinged, and looks poised to retest the 1.30 handle, at least in the short term. USD/MXN was back above 12.30. USD/MXN had spiked to as high as 12.35 from 12.28 during the US session, before plunging down back down to 12.25. MXN looks to be extremely well bid, as evidenced by this whipsaw action. As such, selling USD/MXN on rallies remains the preferred strategy. I have my offer in at 12.35. I booked profits on a short deal which got filled at 12.30 this morning. I ended up exiting at 12.26, in light of the awesome volatility. That said, I have maintained a core position in anticipation of a further leg downward. Patience is necessary with MXN. Bouts of risk aversion beat this currency up, but the excellent fundamentals mean that longterm it will appreciate. Be willing to ride out short term losses, rake in carry, and look for MXN to make multi-year highs.
Back on the JPY outflow story, the wires are a buzz with JPY funded carry trade ideas. Aside from MXN, many names seem to like TRY. As far as very high yielding currencies go, Turkey's lira looks to be the best bet. Though Turkey is running a current account deficit of 6.6 percent of GDP, it is making progress on this front. Last year the current account deficit was approaching ten percent of GDP. Turkey's current account woes come from the unfortunate fact that it must import nearly all of its fossil fuels. The fiscal deficit is relatively modest, coming in at 2.8 percent of GDP. Finally, a recent sovereign upgrade means that Turkey really shouldn't have trouble finding the external financing to plug either of these holes. This contrasts nicely with other high yielding currencies such as ZAR and INR. Both 'yield' over six percent, but South Africa and India both face widening current account and fiscal deficits in the five percent of GDP range. India is on notice of a possible downgrade, and South Africa was already downgraded earlier this year. Growth is slowing in all three of these countries, with quarterly GDP well below potential. In sum, TRY looks to be the best bet for carry trades. TRY has a nice yield, as is probably faces little risk of depreciation in the medium term. ZAR and INR yield more, and will appreciate if these countries get their acts together. However weak fundamentals coupled with deteriorating sovereign credit worthiness means that these currencies could face sharp and sudden depreciation on any sort of bad news. I certainly was on board the long TRY/JPY trade from 47 to 53, missing the latest jump higher to the 55 levels we see now. If I decide to establish a position again I will try to buy a dip, and target 60 in the long term.
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