What's next for Mexican peso, Pakistan rupee and Turkish lira

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Whats next for Mexican peso, Pakistan rupee and Turkish lira
More than two-thirds of Mexican peso government debt is owned by Wall Street.

Dubai - It's no wonder that peso is at all-time lows against the US dollar

By Matein Khalid
 Global Investing

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Published: Sun 17 Jun 2018, 5:23 PM

Last updated: Sun 17 Jun 2018, 7:25 PM

Mexican dictator Porfirio Díaz is immortalised for his lament "Poor Mexico. So far from God, so close to the United States". This is so true even though Diaz did not live long enough to see Donald Trump in the White House, whose campaign fanned xenophobia against Mexican immigrants ("bad hombres") with his promise to build a border war that he would force Mexico to pay for. Trump has also threatened to tear up Nafta and has imposed tariffs on Mexican steel, aluminium and, in the future, cars.
It is no wonder that the Mexican peso, the most liquid currency in the emerging markets, has been a profitable short after the 2016 presidential election and is at all-time lows against the US dollar. A new spasm of pessimism over Nafta, contagion from Brazil and Argentina, lower oil prices and Wall Street angst over the imminent election has seen the Mexican peso slammed 13 per cent since mid-April. It is entirely possible that the next President of Mexico could be the populist, leftist candidate Andrés Manuel López Obrador in the July election. This is the reason every macro hedge fund manager I know has been short the Mexican peso, a license to print money ever since the latest emerging market crisis. ("It is not a crisis", UBS and Credit Suisse emerging market strategists robotically intone on CNBC. Yeah, right. Like when Bernanke assured us that subprime would be contained.)
A Lopez Obrador win would mean a breakdown in relations with Washington and a tsunami of capital flight from los gatos gordos (fat cats), the financial elite of Mexico. This could also mean the Mexican peso plunges below its December 2016 levels, possibly to as low as 22. The Mexican peso will be a victim of not just Trump/Nafta and Lopez-Obrador but also King Dollar and higher US Treasury yields. More than two-thirds of Mexican peso government debt is owned by Wall Street - and Gringolandia is bailing out as the peso tanked. There is no respite in sight as the smart money is still short the Mexican peso, if the Chicago futures positioning data is any guide. As in 1994, a Mexican peso crisis will wreak havoc in emerging markets.
The third Pakistani rupee devaluation since December 2017 was as swift as it was inevitable. Pakistan's dismal $10 billion foreign exchange reserves and sheer scale of external debt means Islamabad will have no choice but to seek an IMF loan, which mandates a lower rupee, possibly as low as 128-130 against the US dollar. I doubt if a populist like Imran Khan, despite his close ties with the Rawalpindi GHQ, who is viscerally anti-American can implement a classic IMF programe to address Pakistan's balance of payments crisis. This means the State Bank will be forced to squeeze consumers/imports with a much lower rupee. With foreign reserves now at a mere two months of imports, the electorate may well vote PML-N back to power, despite Nawaz Sharif's disqualification by the supreme court. Ironically, the PLM-N's managed float and failure to address the $27 billion trade deficit and capital flight (Mianomics, Mayfair flats and Panama trusts!) made a draconian rupee devaluation inevitable. A hostile Trump means Pakistan's white knight might not be the IMF but the People's Bank of China. The Powell Fed raised interest rates at the June FOMC and projects two more rate hikes in 2018. This means the US Treasury debt yield curse could well invert sometime next summer. This is a terrible prospect for the Turkish lira, 4.70 to the US dollar as I write. This means the desperate rate hikes by the Ankara central bank are in vain as the Fed goes hawkish and the global liquidity pump sputters.
I expect the Turkish lira to continue to fall despite its rate hikes as its current account deficit will be hit by the slowdown in Germany and France, critical destinations for Turkish exports. As if the macro storm clouds on the Bosphorus was not bad enough, President Erdogan has threatened to lend an "operation" against rating firm Moody's after it placed Turkish sovereign debt on review for a downgrade. In the past, Erdogan has blamed an "international interest rate lobby" for Turkish macro woes. No wonder Fitch has shut down its Istanbul office. If AKP wins the June 24 election, confidence in the Turkish lira will plunge and it could trade as low as 6 to the dollar.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.


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