When to Buy Emerging Market Currencies

Now, as travel agents are pointing out, is a great time to use your strong US dollars to travel virtually anywhere in the world. Now is not necessarily a great time to be holding Colombian pesos, Brazilian reals or Russian rubles. But markets turn around and when they do there are profits to be made. When is a good time to buy emerging market currencies? We wrote about trading the Colombian peso in February of 2015 and would like to revisit the USD COP.

In 2012 the Colombian peso out distanced all other currencies versus the US dollar. Now trading the Colombian peso has to do with anticipating when the currency will hit bottom versus the dollar and when the price of crude oil will come back up. In December Bloomberg reported that the peso leads global losses due to the massive fall in oil prices.

Colombia’s peso fell to a five-year low and led losses among world currencies as the price of crude oil, the Andean nation’s biggest export, sank to a five-year low.

The peso sank 2 percent to 2,396.69 per dollar at the close in Bogota, the weakest since April 2009. The drop was the biggest among 31 major currencies tracked by Bloomberg. The peso has tumbled 12 percent in the past month.

One would have thought that it would not get much worse for the peso but in fact it has. As of August 26 the USD COP closed at 3,261.53 pesos to the dollar. The value of the COP is tied virtually one to one to the price of oil. When to buy emerging market currencies in the case of the COP is when oil starts to recover. But, when will that be?

Chinese Economy, US Fracking, Iran Nuclear Deal, Saudi Output

The price of oil is determined by supply and demand. Because the Chinese economy is slowing they are not importing as much oil. Because of the US fracking boom the USA is importing less oil. The Iranians expect to sell ever barrel they produce one sanctions are lifted after the nuclear deal. And, Saudi Arabia does not want to lose market share so they are not cutting back on production. The problem is that Saudi Arabia may go broke before the US oil industry cuts back according to The Telegraph.

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

With lower demand and excess output the likelihood of a drop in oil prices in the coming months is pretty low. When to buy emerging market currencies like the COP, Real, or Ruble will have to wait for an oil recovery and an uptick of the Chinese economy.