More pain ahead for battered emerging currencies, options show

Last Updated: Tue, Aug 27, 2013 16:00 hrs

By Anirban Nag and Sujata Rao

LONDON, Aug 27 (Reuters) - Emerging market currencies such as the Indian rupee and the Turkish lira have plunged to record lows against the dollar and trends in the derivatives market indicate little respite ahead.

One-month implied volatility, a gauge of expected swings in some emerging market currencies and derived from options prices, has jumped to its highest in years, reflecting investor nervousness.

While for the rupee and the Indonesian rupiah implied volatility is at its highest since 2008 and 2009 respectively, Turkish lira volatility is at levels last seen in early 2012.

That means more sharp moves are likely over the coming month.

"The story is the impact of rising U.S. Treasuries on current account deficit currencies and that is fuelling the rise in implied volatility on these currencies," said Sebastien Barbe, head of emerging market currency strategy at Credit Agricole in Paris.

Demand for bets favouring the dollar has mushroomed since the Federal Reserve signalled in May it could start withdrawing monetary stimulus, perhaps as early as next month.

That drove U.S. Treasury yields to two-year highs . So long as yields were stuck near record lows, cheap money printed by the Fed made its way to emerging countries for higher returns. That helped countries dependent on foreign capital inflows to plug gaps in their external accounts.

But that flood of cheap dollars could end soon, threatening economies with large current account deficits, such as India.

One-month risk reversals, which measure the relative demand for options on a currency rising or falling against the dollar, also show a growing bias for further weakness in the rupee, rupiah and lira in the near term.

Credit Agricole's Barbe expects the rupee to remain under sustained pressure. One-month rupee risk reversals show increased demand for dollar calls, or bets it will rise, with the premiums for these options rising to as high as 2.75 vols late last week from 0.4 in early January.


Emerging market currencies came under fresh pressure on Tuesday as investors sold them and bought safe-haven assets given escalating tension stemming from the crisis in Syria.

Currency traders in London said hedge funds were placing more short bets against the Turkish lira and the rupiah.

The one-month lira risk reversal shows its highest bias in favour of the dollar since mid-October 2011, Reuters data showed. One-month vols have jumped from around 11 percent on Friday to around 14.5 percent on Tuesday as the lira hit record lows.

"Our view on the lira risk remains biased towards the bearish side, as the central bank clearly shows ongoing reluctance to act more aggressively on the rates front," said Luis Costa, head of CEEMEA FX and debt strategy at Citi.

"It is still difficult to imagine a short-term stabilisation in lira back-end vols, given the rather evasive response by the central bank."

In Asia, the Indonesian central bank called a board meeting on Thursday amid widespread speculation it may soon have to raise rates again to defend the rupiah, which has fallen 12 percent so far this year.

One-month rupiah risk reversals have jumped to 5.1 vols in favour of dollar calls from 3.1 at the start of the month.

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