By Anirban Nag and Sujata Rao
LONDON Aug 27 Emerging market currencies such
as the Indian rupee and the Turkish lira have plunged to record
lows against the dollar and trends in the derivatives market
indicate little respite ahead.
One-month implied volatility, a gauge of expected swings in
some emerging market currencies and derived from options prices,
has jumped to its highest in years, reflecting investor
While for the rupee and the Indonesian
rupiah implied volatility is at its highest
since 2008 and 2009 respectively, Turkish lira
volatility is at levels last seen in early 2012.
That means more sharp moves are likely over the coming
"The story is the impact of rising U.S. Treasuries on
current account deficit currencies and that is fuelling the rise
in implied volatility on these currencies," said Sebastien
Barbe, head of emerging market currency strategy at Credit
Agricole in Paris.
Demand for bets favouring the dollar has mushroomed since
the Federal Reserve signalled in May it could start withdrawing
monetary stimulus, perhaps as early as next month.
That drove U.S. Treasury yields to two-year highs
. So long as yields were stuck near record lows,
cheap money printed by the Fed made its way to emerging
countries for higher returns. That helped countries dependent on
foreign capital inflows to plug gaps in their external accounts.
But that flood of cheap dollars could end soon, threatening
economies with large current account deficits, such as India.
One-month risk reversals, which measure the relative demand
for options on a currency rising or falling against the dollar,
also show a growing bias for further weakness in the rupee,
rupiah and lira in the near term.
Credit Agricole's Barbe expects the rupee to remain under
sustained pressure. One-month rupee risk reversals show
increased demand for dollar calls, or bets it will rise, with
the premiums for these options rising to as high as 2.75 vols
late last week from 0.4 in early January.
TURKISH LIRA, INDONESIAN RUPIAH
Emerging market currencies came under fresh pressure on
Tuesday as investors sold them and bought safe-haven assets
given escalating tension stemming from the crisis in Syria.
Currency traders in London said hedge funds were placing
more short bets against the Turkish lira and the rupiah.
The one-month lira risk reversal shows its
highest bias in favour of the dollar since mid-October 2011,
Reuters data showed. One-month vols have jumped from around 11
percent on Friday to around 14.5 percent on Tuesday as the lira
hit record lows.
"Our view on the lira risk remains biased towards the
bearish side, as the central bank clearly shows ongoing
reluctance to act more aggressively on the rates front," said
Luis Costa, head of CEEMEA FX and debt strategy at Citi.
"It is still difficult to imagine a short-term stabilisation
in lira back-end vols, given the rather evasive response by the
In Asia, the Indonesian central bank called a board meeting
on Thursday amid widespread speculation it may soon have to
raise rates again to defend the rupiah, which has fallen 12
percent so far this year.
One-month rupiah risk reversals have jumped to
5.1 vols in favour of dollar calls from 3.1 at the start of the