Lesser-Known Forex Trades Worth Trying

05/29/2012 3:15 pm EST

Focus: CURRENCIES

Daniel Hwang

Senior Currency Strategist, Gallant Capital Markets

Looking outside of the major currency pairs, Daniel Hwang of FOREX.com identifies compelling possibilities in emerging currencies like the Turkish lira, South African rand, and Mexican peso.

Emerging market currencies: where to look for the values, the trades, and how to trade them once you’re there. We’re here with Daniel Hwang, and why don’t you tell us what you’re looking at?

I think looking for relative value from a perspective of taking Central Bank policy directions is one way to look for value in emerging markets.

For instance, the European Central Bank (ECB) and the Fed are likely to take on more quantitative easing measures, and we have Hungary and Turkey, because of their high inflations—Turkey has double-digit inflation at this point—likely to take on more policy tightening. So that creates sort of a carry trade within emerging markets.

See also: Are New Carry Trades Coming Soon?

And you’re on the periphery of Europe with both of those countries too, and so you might see some value there.

Exactly, and they have had such a big fallback in terms of the currencies losing value over the past year or so, that when we do see a bit of a rebalance, we’re likely to see emerging markets—just like in 2009—start to really outpace to the upside.

That’s interesting, and those are two countries that usually aren’t on people’s radar when they talk emerging markets.

No, they are not. Everyone is typically looking at China, Brazil, Russia, pretty much the BRICs, but these lesser-known emerging market currencies and economies also do have significant potential for upside (or downside, as well) depending on the movement of the global economy.

You can play it both ways, so that’s a nice thing about it.

Right.

Are there any commodity countries? We think of the BRICs when we think of emerging markets, and we forget about a lot of other countries out there. The same thing could be said for commodity-based economies like Canada and Australia, for example. Are there any others that are off most people’s radar that should be good values to look at?

Absolutely. I would say in terms of emerging markets, the South African rand and the Mexican peso are two currencies that are the, let’s say, Australian dollar and the Canadian dollar for emerging markets.

Let’s say we do see the ECB and the Fed take on more easing. That should have some sort of an upside pressure on inflation. So we would see prices rise and that should also support commodities.

So what we’re looking at is the outlook for the rand and the Mexican peso, which are very high-beta currencies, to potentially move higher, depending on when the Fed and ECB take on more QE.

With South Africa, you think of gold for the most part, and some of the industrial metals and minerals, but Mexico, where does that come in as a commodity-based currency? Is it their oil?

It’s partly oil. A lot of it is also their correlation with the US in terms of US economic performance. That typically also does support commodities because of just speculation or increased demand.

So partly the Mexican peso has more of a relationship with the US, but that also kind of filters out to the commodity side.

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