As Greece Weakens Euro, Turkish Lira Attractive, SocGen Says -- Barron's Blog

        By Dimitra DeFotis
        Emerging market currencies face heightened financial market turbulence in the coming days, with negative news from Greece combining with U.S. Federal Reserve Open Market Committee minutes Wednesday.
        "The Greece referendum ... was probably underpriced by financial markets. In early trading, the EUR and AUD have taken a hit ... and the risk-off atmosphere will percolate to emerging markets as investors reduce exposures and flock to safe haven assets," writes Jason Daw, a Societe Generale analyst.
        He thinks the short-term, risk-off environment in emerging market currencies should support Turkish lira (TRY) outperformance over the South African rand (ZAR). Each currency was part of the inaugural "Fragile Five," the result of inflation, current account deficits and other risks as the U.S. federal reserve raises rates. (See the March Bloomberg story, " Fragile Five Down To Three As Fed Looms Over Emerging Markets.") In addition, the Polish zloty (PLN), Hungarian forint (HUF) and Romanian leu (RON), are sensitive, Daw notes, given their reliance on Europe for growth, and in the case of Romania, financial links to Greece.
        The euro slid 0.6 percent to $1.1043 in Tokyo trading as of 9:15 p.m. EST after declining to $1.097, its lowest level since June 29. The euro earlier declined as much as 1.3 percent.
        SocGen writes:
        "Fear of the Fed was the main force driving USD-EM higher in the recent past and this will continue in the coming months leading up to the first hike (Societe Generale expects September). Developments in Greece will serve to reinforce the weakness in EM currencies. FOMC minutes Wednesday are unlikely to deliver a sufficiently dovish message to engender a sustained relief rally ... Our trade recommendations retain exposure to long dollar risk and relative value structures that are positively correlated to USD-EM upside ...
        The USD-EM rally is not over. Despite the Fed being less hawkish than expected (June 18) USD-EM has been on an upward trajectory. This points to severe fragility in EM sentiment and possibly positioning that was not as long dollars as consensus believed. ... short covering rally in USD-EM ... remains a perceptible risk as our Asia FX positioning metric ... suggests that speculative investors are short dollars on average."
        The iShares MSCI Turkey ETF ( TUR) is down 17% this year, compared to a 19% decline in the Global X FTSE Greece 20 ETF ( GREK) so far this year. The Vanguard FTSE Emerging Markets ETF ( VWO) is up 2.6% year to date.
        (END) Dow Jones Newswires

        July 05, 2015 22:48 ET (02:48 GMT)

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