Midweek Position Summary: Playing the Fiscal Cliff, Yen Weakness, and a non Mexico Growth Story

Portfolio Composition:

Short USD/MXN 50 percent

Long TRY/JPY    8.3 percent

Cash                     41.7 percent

Booked a handsome post-election profit on a long USD/JPY position over the weekend,  freeing up cash which accounts for my considerable reserve of unemployed funds.  I remain cautiously optimistic that the Mexican Peso will finish the year strong, and therefore maintain sizable short USD/MXN position. At the same time, I plan to keep at least 25 percent of my portfolio in cash to insulate myself against fiscal cliff driven volatility, or to take advantage of pullbacks caused by delays in the negotiations between the White House and Congress.

Playing the Yen weakness longterm, I have established a very small long TRY/JPY position.  Turkey's economy has considerable exposure to Europe, which is the destination for much of its exports.  While I expect Europe will slowly but surely walk away from the cliff and return to growth, the path will be long and volatile.  At the same time, Turkey has also diversified its exports, selling its products to booming central Asian and Mideastern economies.  Turkey is slowly consolidating its fiscal position.  The Turkish government has shrunk the deficit to 1.4 percent of GDP from the 2010 peak of 5.5 percent of GDP, albeit probably at the expense of considerable growth.  However, the normalizing of the economy has caused inflation, a major concern two years ago, to ease considerably.  Turkey's massive current account deficit, reaching nearly 10 percent of GDP, is a priority for both the government and central bank.  Turkey must import 97 percent of its energy.  However, Turkey is currently bringing a pipeline from the Caspian Sea online.    Turkey remains vulnerable to regional instability, with borders with Iraq, Iran and Syria.  Indeed, a Syrian rocket attack on a Turkish border town caused a sell off of Turkish assets last month.  The Lira regained its footing and then some however within days.  Despite these downside risks, Turkey remains a strong growth story that was brought to an untimely end by the 2008 crisis.  Turkey's own banks weathered the crisis fine, and it was only global external factors which drove Turkey into recession.  As the world recovery takes hold, I expect demand for Turkish assets and products to strengthen.  Finally the efforts by the central bank to shore up the current account deficit should also lend support to the Lira. 

In sum, opportunities exist for investors willing to do the work.  But as always, great care is required.