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EM currencies have snapped back under the influence of oil as the sudden, large drop has triggered ToT adjustments and concerns about financial stability in some cases. Strategists at TD Securities expect further FX weakness before oil stabilizes.

Key quotes

“We estimate that every 10% in oil price changes should result in about 2.6% change vs USD, on aggregate, in EM FX currencies.” 

“We are seeing a regime for EMFX in which it is trading positive with US rates while correlations with commodity prices are reversing their slump.” 

“Oil prices settling at or below $35/barrel may represent an undesirable outcome even for Russia. This suggests that the use of oil prices as a tool to exert pressure on the US, in particular, is likely to be already stretching close to its downside limits.” 

“RUB, COP, and MXN will remain particularly exposed to further news here while defensive like the CEE block and heavily managed currencies like CNH-CNY should be less exposed to these headlines.”