- The Case for a Stronger US Dollar (USD)
- Aggressive New Czech QE Measures
- Huge Upside Potential in USD/CZK
A number of emerging market economies would definitely welcome US dollar (USD) appreciation, not the least of which would be Brazil, which has suffered from a fast-rising Brazilian real (BRL) while the dollar weakened due to the effects of quantitative easing (QE) in the US.
Brazil, a key exporter of soft commodities, has found it rather difficult to maintain a ceiling on the exchange rate, and while BRL has come off a lot since the beginning of the year, in historical terms, there is still plenty of room to run.
Strong currencies tend to hurt exporters and producers, however, rapid currency depreciation could reignite inflation risks. It is difficult to find the right balance between the two, but nevertheless, improving US economic data comes as good news for dollar bulls and emerging market bears, at least as far as currencies are concerned.
The most important task for traders is to find the currency pair with the highest profit potential. The Turkish lira (TRY), South African rand (ZAR), and Indian rupee (INR) have already seen substantial moves to the downside, and while BRL may be a better choice, Brazil's central bank could still intervene again in order to slow the currency’s slide and remove inflation pressures.
In my opinion, there is one emerging market currency out there that’s really flying under the radar, but could take a serious hit against the dollar in the coming months. That currency is the Czech koruna (CZK).
With no Czech inflation fears and an overvalued exchange rate, there is a distinct possibility of an explosive move higher in USDCZK.
Another important factor is that on November 7, the Czech central bank began unlimited CZK sales “for as long as needed” in order to fight ultra-low inflation and put a floor on the euro (EUR) exchange rate at 27.
This sounds like the Swiss National Bank (SNB) action that started in September 2011, which was intended to put a floor on EURCHF at 1.20.
With the European Central Bank (ECB) cutting rates last week and leaning towards additional easing in the future to spur Eurozone growth, the dollar could benefit even more and appreciate faster against the Czech currency.
Guest Commentary: Czech Koruna (CZK) to Take Serious Hit
It is also worth looking at the longer-term time frame to see the exchange rate over the past 15 years, which may help to show the full profit potential of this trade, especially if US data continues to improve and the Fed does ultimately announce its plans to taper asset purchases.
With the Federal Reserve considering tapering and the Czech central bank just now easing, monetary policy on both sides will help support this trade, making now a great time to buy USDCZK at current levels.
Guest Commentary: Huge Upside Potential for USD/CZK
Trade Idea for USD/CZK
- Entry: Bought at 20.00
- Target 1: 25.00
- Target 2: 27.00
- Stop: Daily close below 18.00
By Ariel Witulski, Guest Contributor, DailyFX.com