EM FX & Bitcoin Price Overview
- With fresh weakness hitting emerging market currencies in recent weeks – now, the Argentian Peso after elections over the weekend – cryptocurrency markets have been supported.
- Per the Emerging Markets Crisis Monitor, external debt-to-GDP ratios, implied FX volatility, and bond risk premia are some of the key factors that traders need to keep an eye on when looking for potential trade opportunities in EM FX.
- The Argentinian Peso – with an external debt-to-GDP over 50%, a debt-to-GDP ratio over 100%, sharply elevated implied FX volatility, and now rocketing credit default odds – is experiencing dramatic, but unsurprising, weakness.
Looking for a guide on how to analyze Emerging Market Currencies (EM FX)? Read the Emerging Markets Crisis Monitor.
Emerging markets are in the news at the start of the week for all the wrong reasons. From the Turkish central bank running low on FX reserves, to the People’s Bank of China no longer defending the 7.0000 level in USDCNH, to USDINR breaking out to the topside around developments surrounding the India-Pakistan rift over Kashmir and Jumma, investors are proving more and more uneasy with respect to investing in emerging markets.
The latest batch of bad news for emerging markets came over the weekend when Argentinian President Mauricio Macri lost the first round of elections, raising the odds of the incumbent losing office later this year; Alberto Fernandez and his running mate, former president Cristina Fernandez de Kirchner, look set to take power.
Fears of a dramatic economic retooling for the struggling South American nation have raised concerns of a deeper economic downturn, raising the odds of a credit default event in the next few years: 5-year credit default swaps are now showing a 75% implied probability. These concerns may be well-founded: under the prior administration – run by Fernandez de Kirchner – defaulted on $95 billion of sovereign debt.
Why Does Crypto Benefit When EM FX Suffers?
A quick recap: bitcoin and cryptocurrencies are not “safe haven currencies” per se, as they lack key features of being a currency in the first place, main of which is a ‘stable store of value.’ But if you’re not using bitcoin and other cryptocurrencies as ‘stores of value,’ then, given the electronic nature of the globalized economy in 2019, the cryptocurrency market, coins and tokens can all be used as intermediaries to move capital beyond of the reach of governmental agencies.
Why would a market participant want to move capital around without government interference? If capital controls are in place, then it may be impossible to render the production of goods or services at fair value, especially in an emerging market economy. It may not be due to domestic conditions alone, either fiscally (via elections) or monetarily (via central banking independence). Instead, it could be due to external factors, like economic fallout from an international trade war.
Bitcoin Driver Flips from Turkish Lira to Chinese Yuan
Per the Emerging Markets Crisis Monitor, external debt-to-GDP ratios, implied FX volatility, and bond risk premia are some of the key factors that traders need to keep an eye on when looking for potential trade opportunities in EM FX. The Argentinian Peso – with an external debt-to-GDP over 50%, a debt-to-GDP ratio over 100%, sharply elevated implied FX volatility, and now rocketing credit default odds – is experiencing dramatic, but unsurprising, weakness.
Argentinian Peso (USDARS) vs Bitcoin (BTCUSD)Technical Analysis: DailyChart (September 2018, 2018 to August 2019) (Chart 1)
For most of 2019, weakness in the Argentinian Peso has gone in-hand with strength in cryptocurrency markets, especially Bitcoin. In June and July, as EM FX concerns were tamped down thanks to a détente in the US-China trade war, the relationship between EM FX and cryptocurrency markets abated. However, with fears being rekindled at the start of August, we’ve seen correlations between cryptocurrencies and EM FX tighten up once more. The 20-day correlation for Bitcoin and USDARS is 0.58.
Argentinian Peso (USDARS) vs Bitcoin (BTCUSD)Technical Analysis: HourlyChart (September 2018, 2018 to August 2019) (Chart 2)
Looking at the hourly timeframe, the reemergence of global growth fears around the US-China trade war at the start of August have clearly help support Bitcoin prices at the expense of EM FX. Now that risks have moved from ‘systemic’ – reverberating across EM FX – to ‘domestic – political issues for Argentina – it’s off little surprise that the rolling 5-day correlation (based off of hourly candles) increased to a near-perfect 0.98 earlier today. This is but perhaps the clearest indication that cryptocurrencies have benefited when EM FX like the Argentinian Peso have suffered.
EM FX and Cryptocurrency Relationship Conclusions
There is still no good reason to think that the strategy perspective initiated in early-April 2019 has been invalidated yet: what’s bad for EM FX –like the Argentinian Peso – is good for cryptocurrencies – like Bitcoin – in general. It remains the case that, if Bitcoin prices and the cryptocurrency market are going to continue their 2019 rally, the best bet may be for the US-China trade war to worsen; and now, for political turmoil in Argentina.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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