Dollar v EM currencies: which will win?

The dollar (USD) has been a victim of the thinning of crowded trades.

Short yields, short euro/long stocks, long dollar was the dominant strategy until just recently.

But if the paring of such positions means the buck declines versus its developed-economy peers - the euro, sterling - how will it fare against emerging-market currencies, which themselves may struggle as higher bond yields in the US and Europe supposedly suck out flighty funds?

Well, Daniel Tenengauzer, head of EM and global FX strategy at RBC Capital Markets, is confident the greenback can maintain its strength against EM, in particular the Mexican peso (MXN).

On Monday he initiated a long USD/MXN position at 15.17. At mid-session on Tuesday the cross was 15.34.

It's a tight trade: he has a target price of 16.00, though he thinks the cross may overshoot.

This is partly because Mexico's policy makers are focusing on weak domestic activity, while the market is not adequately pricing in the chances of a Federal Reserve rate rise this year.

Also, while Mexico's central bank is aware of possible forex volatility, RBC reckons its current mechanism for coping with dollar demand may prove inadequate in that regard.

Mr Tenengauzer has a stop loss on his trade at 14.75, which is around the mark off which the USD/MXN bounced at the start of April and which may be acting, from a chart perspective, as a support level.

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