Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Since the end of last year, the US dollar has persisted around its strongest level in two years on the back of rising US Treasury yields and risk aversion.</li>
<li>I expect the dollar to remain strong at least until the US rates volatility drops meaningfully and the headwinds to US equities, including geopolitical and domestic growth concerns, fade.</li>
<li>Once these risks pass, the dollar – which is expensive in valuation terms – should depreciate as the year progresses, creating a supportive environment for EM currencies.</li>
</ul>


Since the end of last year, the US dollar has persisted around its strongest level in two years on the back of rising US Treasury yields and risk aversion.
I expect the dollar to remain strong at least until the US rates volatility drops meaningfully and the headwinds to US equities, including geopolitical and domestic growth concerns, fade.
Once these risks pass, the dollar – which is expensive in valuation terms – should depreciate as the year progresses, creating a supportive environment for EM currencies.


The US Dollar View and Its Implications for EM Currencies

<ul>
<li>Given the strong performance of several Latin American currencies in recent days, it is fair to ask if these returns are being driven purely by their high carry.</li>
<li>To address this question, we compare the performance of each currency, adjusted by its beta, with its carry, adjusted for its volatility.</li>
<li>While there is some overlap between performance and carry, we find no strong correlation, leading us to conclude that we are currently not in a carry-trade environment.</li>
</ul>


Given the strong performance of several Latin American currencies in recent days, it is fair to ask if these returns are being driven purely by their high carry.
To address this question, we compare the performance of each currency, adjusted by its beta, with its carry, adjusted for its volatility.
While there is some overlap between performance and carry, we find no strong correlation, leading us to conclude that we are currently not in a carry-trade environment.


Is Carry Driving the Returns of EM Currencies?

<ul>
<li>The turnaround of Asian currencies is likely to continue with growth resurfacing in the region ex-China and the interest rate differential with the rest of emerging markets narrowing.</li>
<li>The main risks to watch are whether the slowdown in China worsens and weighs on the region as a whole and whether central banks embark on FX interventions again.</li>
<li>While the overall view on Asian currencies is constructive, I prefer cross-country trades to take advantage of differences arising from idiosyncratic drivers and to eliminate the dollar risk.</li>
</ul>


The turnaround of Asian currencies is likely to continue with growth resurfacing in the region ex-China and the interest rate differential with the rest of emerging markets narrowing.
The main risks to watch are whether the slowdown in China worsens and weighs on the region as a whole and whether central banks embark on FX interventions again.
While the overall view on Asian currencies is constructive, I prefer cross-country trades to take advantage of differences arising from idiosyncratic drivers and to eliminate the dollar risk.


Drivers Behind the Turnaround of Asian Currencies

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Technical Analysis

<ul>
<li>DXY long at 94.50 targets of 97.50/98 is on track but the impulsive nature of the rise does increase odds of an overshoot if the 10yr yield clear 1.95%.</li>
<li>Bias/Focus: Euro breakdown targeting 1.10 turn support. AUD and NZD plunge. USD bid in EM gearing up.</li>
<li>Conviction: Stick with AUD and NZD shorts, Buy USD on dips in EM and parts of Asia (SGD potential triple low, THB bull wedge and INR flirting with 75).</li>
</ul>


DXY long at 94.50 targets of 97.50/98 is on track but the impulsive nature of the rise does increase odds of an overshoot if the 10yr yield clear 1.95%.
Bias/Focus: Euro breakdown targeting 1.10 turn support. AUD and NZD plunge. USD bid in EM gearing up.
Conviction: Stick with AUD and NZD shorts, Buy USD on dips in EM and parts of Asia (SGD potential triple low, THB bull wedge and INR flirting with 75).


Dollar Momentum/Risk Pressure - Greenback Top Will Front Run a Yield Peak

<ul>
<li>The US dollar has started appreciating again on the back of a safe-haven bid with risk aversion rising due to the Fed's upcoming rate-hiking cycle and the Russia-Ukraine tensions.</li>
<li>Given my expectation of rising dollar volatility, I had recommended hedging a diversified EMFX portfolio with the euro. Indeed, the euro hedge has worked well over the past three months.</li>
<li>I continue to prescribe maintaining the euro hedge. If the dollar remains volatile, I don't expect the low volatility of EM currencies – dragged lower by Asia – to persist. </li>
</ul>


The US dollar has started appreciating again on the back of a safe-haven bid with risk aversion rising due to the Fed's upcoming rate-hiking cycle and the Russia-Ukraine tensions.
Given my expectation of rising dollar volatility, I had recommended hedging a diversified EMFX portfolio with the euro. Indeed, the euro hedge has worked well over the past three months.
I continue to prescribe maintaining the euro hedge. If the dollar remains volatile, I don't expect the low volatility of EM currencies – dragged lower by Asia – to persist. 


Value of Euro as a Hedge for EM Currencies in Times Like These

Brazil

The Brazilian real is the official currency of the Federative Republic of Brazil.  

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The US Dollar View and Its Implications for EM Currencies

Although the dollar should remain strong in the near term at least until we get clarity on the Fed path, it should depreciate for the remainder of...

Gautam Jain, PhD, CFA

Is Carry Driving the Returns of EM Currencies?

The high carry of a few currencies appears to be one factor behind their recent strong performance, but on further examination, I conclude that we...

Gautam Jain, PhD, CFA

Drivers Behind the Turnaround of Asian Currencies

The turnaround of Asian currencies is likely to continue with growth resurfacing in the region ex-China and interest rate differential with the...

Gautam Jain, PhD, CFA

Dollar Momentum/Risk Pressure - Greenback Top Will Front Run a Yield Peak

DXY 94.50 LONG targets of 97.50/98. the impulsive nature of the rise increases overshoot odds when the 10yr yield clears 1.95%. High conviction...

Thomas Schroeder

Value of Euro as a Hedge for EM Currencies in Times Like These

Given my expectation that the dollar should remain volatile in the near term, I continue to recommend maintaining a euro hedge for a diversified...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

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