Live on Bloomberg TV

00:00It's not surprising on this move on the Mexican peso given Donald Trump's stance. Do you think of these moves have been overdone. No not at all. We believe these. This is probably just the beginning. To be honest because emerging market currencies will weaken further as we get this shift from money . The shift of money from from the rest of the world to the US and it just seems that emerging market currencies currently being sick Nikkei significantly underperforming and that trend is going to continue as you rightly point out the Turkish lira has fallen about 3 percent it's down almost 10 percent on the year . The central bank there is quite concerned and reluctant to raise interest rates. This is in a climate when their forex reserves have been depleted and it's no surprise that is the worst performing currency and if we expect the US dollar to strengthen further this year which is our baseline call then those emerging market currencies like the lira and the peso will continue to fall. That's the key here Tony. The central banks and what they are or are not able to do I put this chart together which shows you this spot rate exchange from the Mexican president the US dollar you could put it up on your Bloomberg would have also added. Here is the one year swap rate and you can see that the expectation is going forward that the central bank might be hiking rates even further. But can they even arrest this decline in the value of their currency well that will be the telling point. And it's all going to be I guess. Constructed based on where the US market goes. Now we know the US Federal Reserve has already raised its forecast for three rate hikes in 2017. I think this is going to set the platform for emerging market currencies so the trend is your friend in these types of situations and we expect that to continue because 2017 promises to be full of surprises and with the with the Republicans now in control of both both houses of Congress I think we're going to see massive corporate tax reform and that's going to have a profound influence on those emerging markets as well. Tony a good thing that you're talking about the US because you point to the risk this year of the current account deficit in the US widening. What about the net income balance because if U.S. rates go up and the economy strengthens the gap between what the US pays foreigners on their U.S. assets and what it receives on its foreign assets well that could lead to more deterioration there was the risk to the greenback Well the risk to the greenback is that you know these these inflationary pro US economic growth policies that we've been talking about could come back to bite the US dollar. Now our baseline forecast is for the US dollar to surge another 10 per cent in 2017 but when we take into account the border adjustment tax that Donald Trump's been talking about the potential treatment of domestically purchased goods and imported goods differently we could see the export subsidies rule and we may also see tax revenues rise because the US tends to import more than it exports. Now what that means is if the Trump administration can regenerate and renegotiate some of those trade deals that they've been talking about it's going to increase manufacturing jobs and that's the reason why right pro US growth story and the higher higher interest rate story is is really what the market is looking for and we're looking for some for some hints and some guidance from Trump's comments overnight . Early this morning but unfortunately it wasn't very inspiring Tony. Tony speaking from hints in terms of the other majors that we're watching of course we are looking ahead to German GDP data we're looking at to the ongoing fiasco when it comes to banking the month of passkey in Italy and possible systemic risk here for Europe. Where is the euro going to go from here and how do you navigate that our baseline forecast for the euro use Office for Euro to approach parity in coming months. We based that on the surging U.S. dollar story as we've mentioned plus there's major political risk in Europe. We've got elections in the Netherlands in March France in April Germany in September and possibly even Italy. And this is going to create more of an uncertain outlook especially given the hard Brexit concerns that the UK is currently going through. And that's as a result with we're forecasting Euro to approach parity and it will continue to do that as capital flows keep moving away from Europe to the US. And if the corporate tax reforms take shape then we'll see more and more companies repatriate profits to the US. Hence the reason for that inflationary outlook is all of this uncertainty. The reason why the cost to hedge against fluctuations in the yen the Japanese yen over a year using options has surged to the highest level in one in about three years because if you take a look at this chart you can see that the implied volatility at the one year implied volatility against the dollar for the Japanese yen. That's now rising 54 basis points. Why is there such a lack of consensus on where the yen is going and where do you put the yen Well we were looking at the yen. Basically to continue to weaken further out our forecasts for dollar end in 2017 is for it to touch 125. Later on this year. But looking at the charts on dollar yen there's a bit of a double top formation around 1 1830. And we've seen a decent pullback back towards and sub that 115 level overnight. And we believe that level of support will hold. We're where we're forecasting the yen to be bought on the dips and we consider that to be the case because if you look at the Bank of Japan their outlook is no change. In fact they didn't even loosen their monetary policy stance when they had the chance late last year. And this is going to pressure the Japanese government to increase spending this year. And what that means is it will reduce national saving and it will narrow the current account surplus that they enjoy and that current account surplus is a key driver of the dollar yen . Hence the reason why we believe dollar end is a buy on the dips opportunity look forward to rally back towards where he if and when the US dollar surges given the economic policies that we're waiting for .

No schedule data available.

Where Emerging-Market Currencies Are Headed in 2017

Tony Boyadjian, senior vice president of foreign exchange at Compass Global Markets, discusses the outlook for emerging-market currencies with Bloomberg's Yousef Gamal El-Din and Shery Ahn on "Bloomberg Markets: Middle East." (Source: Bloomberg)

More From Bloomberg Daybreak: Middle East
All episodes and clips