Emerging market currencies remain under selling pressure as Fed liftoff comes back into focus. Between that and lower commodity prices, EM will have trouble finding much traction and so we remain bearish. USD-ZAR and USD-MYR are making new cycle highs today, and we expect USD-BRL, USD-CLP, and USD-COP to do likewise when Latin American markets open.
—Marc Chandler, global head of currency strategy, Brown Brothers Harriman
Marshmallow Alpha-Bits, introduced in 1990, contained frosted alphabet-shaped corn cereal bits and marshmallows. This variation of the original Alpha-Bits cereal contained marshmallow vowels: pink A's, yellow E's, purple I's, orange O's, green U's, and, later, blue Y's. Over time, the marshmallows underwent changes such as super-swirls and splits in their colors. As of 2011, Marshmallow Alpha-Bits have been discontinued.
The alphabet soup known as the foreign exchange market is dollar-, euro-, and yen-centric. There is a lot more going on than a three-nation fixation, and Marc Chandler, above, nails the idea that every currency pair is about the dollar and something else. The something else really matters, and the sum of something elses is an often-ignored reality: Don't just follow the U.S. dollar.
So let's look at "the dollar."
Here is the U.S. dollar as a weighted measure against an alpha-bits cereal of trading partners, including China. The red multi-decade trend line signals structural dollar weakness. The series is logarithmic, which allows a percentage-change analysis across time. I do that with a yellow arrow that shows the strengthening of the dollar in the late 1990s. I then copy and shift the yellow arrow to the right to ask the question: How does recent dollar strength compare with the 1995-2002 period? The answer is that the dollar has advanced about 18 percent (the blue circle) while the vintage dollar advanced about 33 percent. Judging by the yellow line, the dollar still has a long way to go.
The trap that FX amateurs fall into is to focus unduly on EUR, JPY, and USD. Marc Chandler pulls into his study BRL, CLP, COP, MYR, and ZAR. They signal that the rich, uncountable set of global currency pairs and cross-rates are as important as an analysis of the major three. Emerging markets are fragile, oil is south, and the dollar appears north. With commodities imploding, it is time to focus on PHP, THB, PLN, and the other pink-and-yellow marshmallows in the FX Alpha-Bits cereal.
Discuss with various marshmallow vowels.