[LONDON] Bets against commodity-linked emerging currencies are on the rise again as crude prices fall to around US$30 a barrel, but volatility remains well below the peaks of last year.
Brent crude's renewed tumble this year has put commodity exporters' currencies on course to extend last year's losses and some, such as the South African rand and the Mexican peso, have hit record lows.
The Russian rouble is inching lower too, 4 per cent off record lows struck towards the end of 2014, and these spot market losses are filtering into options markets where investors can try to hedge against further weakness. "The oil price fall does pose a challenge for commodity exporters as the weakness isn't fully priced into all the fiscal outlooks yet," said Dominic Bunning, a strategist at HSBC.
He said most exporting countries had calculated their 2016 budgets using much higher oil prices - Russia's for instance assumes US$50 a barrel while Saudi's is thought to assume US$40. "Even if oil stabilises at these levels, fiscal assumptions will be impacted quite dramatically," Bunning added.
One-month implied volatility - a gauge of expected exchange rate swings derived from options prices - on the rouble has risen off five-month lows touched at the end of the year , having risen around 4 percentage points to around 20 per cent.
Vols on the South African rand have jumped to a three-week high of 23.6 per cent while those on the Brazilian real last week hit 2-1/2 month highs before subsiding Volatility is on the rise across asset classes, ranging from Wall Street's main fear gauge of US blue-chip volatility to euro/dollar rates and US junk bonds . Among developed currencies, the Canadian dollar has hit near 13-year lows and the Norwegian crown is near its lowest in more than a year. Implied vols on both are at multi-month peaks.
Gulf currencies, pegged to the dollar, are under pressure too, with the Saudi riyal setting record lows in the one-year forward market.
Risk reversals - a gauge of demand for options betting on a currency rising or falling - also show growing bias for dollar strength versus most EM currencies.
One-month risk reversals on the rouble show bias towards the dollar hit six-week highs at the end of last week while dollar/rand reversals were at one-month highs.
Bearish bets on commodity currencies are however well off the peaks hit last August when the Chinese equity market slumped.
Rouble vols, for instance, were around 70 in early 2015 while rand vols remain off four-year highs hit last month after the sudden removal of a respected finance minister. Brazilian vols rose to around 20 last week but are nowhere near last September's levels around 30.
Indonesian rupiah vols inched up last week but have slipped back to mid-December lows. "Vol markets have not reacted massively to the latest leg down in oil markets and that's possibly because ... positioning is already very long vol," said Luis Costa, head of CEEMEA FX and debt strategy at Citi.
There may also be a sense of many currencies being fairly valued after last year's 20-30 per cent falls versus the dollar.
The rouble for instance has shed 2.2 per cent so far this year, far less than Brent's 12 per cent plunge. There is also little sign of panic-selling among the public - a factor that influenced central bank intervention in 2014. "There are arguments why the weakness may not be as acute as last year and that comes down to valuations," Bunning of HSBC said. "Second, the market is getting used to the idea that the yuan will trade with more volatility. Last August it was like a big bang, now the shock value is not there to the same degree."