Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

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

<ul>
<li>Since the start of the pandemic, the Brazilian real (BRL) has lagged the broad universe of emerging market currencies but it has outperformed this year, narrowing the gap.</li>
<li>I expect BRL to continue outperforming as real rates should keep rising, the fiscal balance has improved, and there is a potential for a positive surprise on the election front.</li>
<li>The positive view on BRL is against other EM currencies, not the dollar. Also, the timing is critical because asset volatility should start picking up as the election approaches.</li>
</ul>


Since the start of the pandemic, the Brazilian real (BRL) has lagged the broad universe of emerging market currencies but it has outperformed this year, narrowing the gap.
I expect BRL to continue outperforming as real rates should keep rising, the fiscal balance has improved, and there is a potential for a positive surprise on the election front.
The positive view on BRL is against other EM currencies, not the dollar. Also, the timing is critical because asset volatility should start picking up as the election approaches.


Brazilian Real Set to Outperform Other EM Currencies in the Near Term

Brazil

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

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

BRL (USDBRL CURNCY)

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

Brazilian Real Set to Outperform Other EM Currencies in the Near Term

I expect BRL to continue outperforming in the near term as real rates should keep rising, the fiscal balance has improved, and there is a potential...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)