With positive sentiment spreading in global markets, the emerging market foreign exchange (EM FX) rally is likely to continue. While sentiment remains vulnerable to renewed concerns about peripheral euro zone as well as China, we still like the EM story medium-term as economic numbers improve globally.

Currency performance this week: Biggest EM gainers vs. the dollar this past week are the Polish zloty (PLN), Turkish lira (TRY), Mexican peso (MXN), Chilean peso (CLP), Malaysian ringgit (MYR), Czech koruna (CZK), and Indian rupee (INR), while only EM losers vs. the dollar this past week are the Peruvian nuevo (PEN) and Argentina pesos (ARS). We remain constructive on EM FX longer-term, but believe that Asian and Latin American currencies for the most part have more upside than those in EMEA.

Trade Recommendations: We continue to focus on cross-EM plays in this environment. With regard to the zloty's recovery from recent softness, we think the losses were overdone and look for continued recovery. Even with a delayed rate hike, we still like PLN/CZK and PLN/Hungarian forint (HUF) to both move higher, and would use pullbacks to go long zloty for long-term targets of 7.50 and 76.69 (both 2008 highs), respectively.

Looking at Asia, we still think recent Thai baht (THB) outperformance will be hard to sustain, especially given rising political tensions, and so we are sticking with our long Philippine pesos (PHP)/THB position. This currency pair was near the top of its recent trading range of 1.38-1.42 but has since fallen below 1.40. We look for a move back to 1.38 and then the Fibonacci retracement at 1.3666 (stronger peso). High Philippine interest rates (4.0%) compared to Thailand (1.25%) means investors will get some carry too.

We are also maintaining our long TRY/South African rand (ZAR) recommendation. That pair is putting in a bottom around 4.8 and we first target the 200-day moving average currently around 5.0684 (stronger TRY) and then the November 2 high of 5.4822. The pullback below 4.80 provided a good opportunity to go long TRY. Turkey rates of 6.5% are no equal to South Africa after the SARB surprised markets with a 50 bp cut in March, and so investors no longer give up any carry costs. We note that the former is expected to start hiking around mid-2010 even as the latter could cut rates at least one more time this year. However, we do acknowledge that Turkish political uncertainty will keep TRY very volatile going forward. Even the end of talks for a new IMF program does not dent our enthusiasm for the lira, as underlying economic fundamentals remain solid. Look to buy TRY/HUF too for similar reasons, with an initial target of 132.85 (2010 high) from current levels around 129.40. Longer-term target is the 2009 high of 145.50.

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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