Tag: EM

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Argentine Banks, the Sequel

Back in October I posted this about Argentine banks, arguing it was a good risk/reward point of entry on the long side, and that appreciation and/or stabilization of the currency was the likely catalyst.

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Today, the chart patterns suggest we are at a good risk/reward point to add to these positions if you don’t already have a full one, or to put a position on if you missed the last window.

Argentine banks are not for the faint of heart. The stocks are fairly illiquid in any meaningful size, and the macro backdrop there, while improved–and supported by an IMF stabilization program–is still fluid and fraught with risks. Moverover, there are general elections (for the presidency, congress, and the governorships of many provinces) coming up in October, and there will for sure be populist, anti-IMF posing posing in the run up to it.

But using chart patterns to identify good risk/reward points and manage downside risk brings with it courage, and here the asymmetries are good-to-excellent. Argentina poorly managed its monetary policy and currency and had a very hard fall. You can see this very clearly in the long-term chart of the four banks included in the October post (BMA, BFR, GGAL, SUPV).

Historically, Argentina finds a way to crawl back from its blowups. Without getting into the weeds, the pattern has been that the country acts less responsibly when times are flush, and more responsibly when its back’s up against the wall. It could be that this time things turn out differently, but that wouldn’t be the high probability bet.

Technically, the patterns, in the main, show higher highs and higher lows, which also improve the odds on the long side.

So, what about the downside?

For the one year charts below, you can see the banks have had a meaningful downdraft/pullback that hasn’t violated that overall pattern of higher highs and higher lows.

This simple approach here would be to put a stop on any buys here (or perhaps on the entire position–depending on how you need to manage your risk) somewhere at ot below these recent local lows. IMHO, given the illiquidity, stops should be done on a closing basis, and probably based on more than one close below the level chosen. Obviously, the “slower” the closing trigger, the greater the scope for exit slippage, and this needs to be reflected in position sizing.

One final point: the currency. The Argentine peso didn’t have the scope for appreciation in its starting point compared to typical macro blow ups, so don’t be too concerned if it doesn’t strengthen significantly. It does however, at a minimum, need to broadly stable. Even slow depreciation is fine. But a surge in local demand for dollars–above and beyond and seasonal and transitory factors (and seasonal factors are large in Argentina)–means they are losing control of the macro framework. And this would show up quite quickly in the bank stocks.

Good luck.

Posted on

The Mexican Peso

Bonds look well bid, the narrative has been swinging from Fed hawkish to Fed dovish, the US is settling back into its potential growth rate (fiscal stimulus is rolling off, and no sign of the supply-side afterburners), and the trend in the 5yr real yield has clearly broken lower.

Against this backdrop, EM currencies should do well. The Mexican peso got out ahead by rallying hard in December, making it tough to jump on here for those who haven’t been involved. But things could be lining up for a big move, if we can get this narrative to persist and a couple/few chart patterns break our way.

Correlated assets can be great leading indicators. In the case of the Mexican peso, there are 3 Mexico-specific assets I look at–beyond, of course, the peso itself.

Here’s USDMXN itself:

This is the five year chart. Betting on a continued move after the December move is tricky, because there are no natural near-by stops above. However, it’s clear that if this structure does break down (say, thru 19.00), there’d be some serious scope for some open field running below.

I also look at the yield on the five year TIIE swap. Here it is, zoomed into the one year chart:

As you can see, and as EM hands know, it correlates strongly to the bigger impulses in the peso itself–even if the relative volatilities are very different. You can also see it looks to be breaking down already.

I also look at the five year CDS on Pemex, the state oil producer. Here that is on a one year chart:

This one has yet to break but is on the verge. It too tends to correlate strongly with general Mexico risk.

Lastly, I look at spread between the yield on the US 10 year and the 10 year Mexican TIIE swap. It too is on the verge.

I watch all four of these, and when one or two break it is usually a sign that the others will follow–as long as the broader narrative remains intact.

The way I am playing this for the Trading style is by putting on a half position now, and adding the rest once I feel “it’s on”. As always, sizing and setting stops is key. Good luck.