Currency crisis is here. Which currencies are the best/worst?

6 mars 2022

In this current environment it is very clear that some countries will be able to tackle this crisis a lot better than others, and therefore their currencies could perform a lot better. We'll start with developed market currencies and then move to emerging market currencies. Won't show charts on each currency, but will try to show the best and simply mention some others to keep an eye on. The currencies that are suffering the most at the moment are the ones in Europe, especially the ones with close relations to Russia, while the ones performing the best are the ones that produce a lot of commodities and have little to no dependency on Russia.

When looking at the Euro, we can see that it was already struggling. Europe has been in terrible situation with some of the lowest growth rates across the entire world. Too much debt, too many political issues, bad demographics and now a huge crisis (energy + food + military). Even though EURUSD is getting oversold and is at support, it doesn't look good. The structure is pretty bearish and it looks like this time around it will break parity. In the short term it might bounce here, however based on several indicators it looks like the largest bounce will probably come around 0.99-1.02. At that point it would get so oversold, while it's the perfect place for late shorts to be squeeze and therefore a good place to close shorts and potentially open a small long. The pound is looking somewhat stronger and it has been performing a lot better than the euro since Mar 2020. It has now pretty recovered most of its lost ground since the Brexit and Britain's strength has increased by leaving the sinking ship of Europe. However it is also heavily affected by all the issues in Europe and so GBPUSD probably has lower to go. The strongest developed market currencies at the moment seem to be the Australian Dollar and the Japanese Yen, with the AUD looking much stronger. The reason is that Australia is really far away from all these conflicts, it has a lot of commodities (hence it benefits from inflation) and is pretty much self sufficient in a lot of ways. Japan is much closer to Russia both in terms of borders, but also in terms of trade & finances, so it is affected more. JPY's strength comes from the fact that it was already pretty oversold and because the YEN is usually seen as a safe heaven.





Now when looking at emerging market currencies, the strongest is the CNH. It has been strengthening vs the USD for a while, and as China has taken a different stance towards Russia compared to the US, it might benefit the most financially. China has changed a lot in terms of its economy and it is trying to dedollarize, while also becoming more self sufficient and having closer ties to Russia. There is no way it won't be affected by all of this, but in the long run it could be one of the biggest winners. The digital Yuan could be big in an era where the USD has been weaponized, and the USD might have to be debased a lot more as the US isn't as self sufficient as China is. Currency wars begun a lot time ago, but now they are intensifying. China benefits from a weak dollar as a lot of its companies have USD denominated debt, but the state of its economy is unknown and I am definitely not indicating that they will be the clear winners out of all of this. Just that the CNH might perform better than the USD and pretty much most other currencies out there. The South African Rand doesn't look all that strong, but it looks stronger than the MXN and the INR which look pretty weak. The one that has been looking surprisingly strong is the BRL, which however could be in a major distribution phase and could be ready to have another leg down.

The worst EM currencies clearly are the Turkish Lira and the Russian Ruble. The TRY started going down a long time ago due to all the crazy policies taken by the government and the Central bank, but mainly due to the fact that the government has borrowed a lot of the USD Turkish people had in their bank accounts. If inflation gets worse in Turkey, then this could force the Gov + CB to turn the USD deposits into TRY, something that could send the Lira in a death spiral. The RUB seems to be in a similar direction as all the sanctions on Russia, as well as all the restrictions from within Russia could really destroy the currency. Since the 2008 crisis & the 2014 Crimea crisis up until Jan 2020, the RUB had lost more than 60-70% of its value. Since then it lost another 50% and most of its losses occurred over the last 2 weeks. We could easily see the RUB go down another 50% as the 'West' has declared a 'financial war' on Russia. Just the USDRUB breakout is an indication that there is probably a long way to go. Going long on the RUB would only make sense if interest rates are so high, while the total RUB supply is close to being equal to the value of the gold reserves the Russian Central Bank holds.

In conclusion the best basket of currencies to hold are the USD, AUD, JPY & CNH, while being short small European currencies, as well as the EUR, TRY, RUB & INR. All fiat currencies will get devalued and most of the fiat currency + bond holders will get the most damage. Those who will probably benefit the most are those being long commodities and hard assets broadly. More ideas coming soon on the commodities, crypto and stocks!