Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<p>The rates curve in Brazil has been flattening on a combination of aggressive monetary tightening by the central bank and lowering of the risk premium on a better-than-expected fiscal performance. Given the risks ahead, primarily the rise in political uncertainty heading into next year's presidential election and the likely fiscal slippage, a curve steepener in Brazil offers an attractive entry point to express a bearish view. A low-risk approach to express the same view is via a butterfly.</p><p>Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.</p>

The rates curve in Brazil has been flattening on a combination of aggressive monetary tightening by the central bank and lowering of the risk premium on a better-than-expected fiscal performance. Given the risks ahead, primarily the rise in political uncertainty heading into next year's presidential election and the likely fiscal slippage, a curve steepener in Brazil offers an attractive entry point to express a bearish view. A low-risk approach to express the same view is via a butterfly.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Does the Curve Flattening in Brazil Offer an Opportunity?

Managing Director

Elan Gore

TMI Data Science

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media.  Our proprietary software, TMI Machine, is a text-mining platform designed with the buy-side & capital markets professional in mind, text-mining the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities.  TMI provides custom leading indicators and systematic trading strategies, operating at the nexus of linguistics & statistics drawing on vast experience in investment banking and hedge fund settings in senior quantitative and fundamental roles.  

TMI Data Science was founded by Elan Gore, an award-winning Senior Global Basic Materials Equity Analyst & China Economist with 15 years of experience in North American hedge funds & institutional managers; and Alessandro Porrino, Ph.D., an Algorithmic Trading Analyst and Programmer with 10 years of front-office experience ranging from complex FX option pricing to auto-hedging strategies at Bank of America Merrill Lynch and Standard Chartered.  Mr. Gore holds an MBA in Finance from New York University Stern School of Business, and Mr. Porrino holds a Ph.D. in Systems Engineering from Brunel University London.

Macroeconomics

<p>In early July, our sentiment indicators flagged a pending downturn in Brazilian equities as we saw the emergence of political risk in a wave of anti-Bolsonaro protests and new corruption scandals, along with Lula's re-emergence as the favored candidate for '22 (see <a href="https://www.smartkarma.com/insights/tmi-snapshots-brazil-macro-sentiment-peaking-pboc-easing-not-a-buy-signal-yet-crypto-sentiment" target="_blank" data-smartkarma-citation="insights:54390" rel="noopener">TMI Snapshots:  Brazil Macro Sentiment Peaking, PBOC Easing Not a Buy Signal Yet, Crypto Sentiment.)</a> In addition, we flagged Brazil's hydro crisis as key potential driver of inflationary shock, with spot electricity pricing set to double.</p><p>Although Brazil remains fragile, we are seeing early signs of a bottoming process as sentiment momentum has turned less negative following the Q3 selloff, and is no longer accelerating to the downside after 3 months of relentless deterioration from June to September:</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/233/606/original/BRAZIL_SENTIMENT_OCTOBER.png?1633429628" class="editor-image img-responsive" data-smartkarma-image-id="233606"></figure><div class="content-caption">Brazil Sentiment Momentum (90D, STDEV Units) vs. EWZ</div> Correlation between our Brazil Macro Sentiment indicator and the iShares MSCI Brazil (EWZ) has been 92% in the T6M, 48% T12M and 47% T24M.  Brazil underperformed sharply in Q3, down -21% in USD terms vs. MSCI EM's -9%, with BRL down -9%.  Following this outlier move, it appears that EM fund positioning has turned neutral to slightly OW Brazil (along with only 2 other OWs in EM - Russia and India - as per EPFR.)</section><section class="figure"></section><div class="content-highlight"><section class="figure">TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary tools text-mine the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. </section></div>

In early July, our sentiment indicators flagged a pending downturn in Brazilian equities as we saw the emergence of political risk in a wave of anti-Bolsonaro protests and new corruption scandals, along with Lula's re-emergence as the favored candidate for '22 (see TMI Snapshots:  Brazil Macro Sentiment Peaking, PBOC Easing Not a Buy Signal Yet, Crypto Sentiment.) In addition, we flagged Brazil's hydro crisis as key potential driver of inflationary shock, with spot electricity pricing set to double.Although Brazil remains fragile, we are seeing early signs of a bottoming process as sentiment momentum has turned less negative following the Q3 selloff, and is no longer accelerating to the downside after 3 months of relentless deterioration from June to September:Brazil Sentiment Momentum (90D, STDEV Units) vs. EWZ Correlation between our Brazil Macro Sentiment indicator and the iShares MSCI Brazil (EWZ) has been 92% in the T6M, 48% T12M and 47% T24M.  Brazil underperformed sharply in Q3, down -21% in USD terms vs. MSCI EM's -9%, with BRL down -9%.  Following this outlier move, it appears that EM fund positioning has turned neutral to slightly OW Brazil (along with only 2 other OWs in EM - Russia and India - as per EPFR.)TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary tools text-mine the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. 

TMI Snapshot:  Early Signs of Bottoming in Brazil Macro Sentiment

<p>While our baseline scenario remains one of the US dollar trading in a range over the coming months, the risk of the range being breached in the near term has increased due to rising US Treasury yields, the possibility of a US government shutdown, an ongoing energy crisis in Europe, and risks from China including a growth slowdown, crackdown of tech companies, and the debt default of one of the largest property developers. Given these risks, for the time being, we recommend hedging EM currencies with the euro, as the two have been highly correlated.</p><p>Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.</p>

While our baseline scenario remains one of the US dollar trading in a range over the coming months, the risk of the range being breached in the near term has increased due to rising US Treasury yields, the possibility of a US government shutdown, an ongoing energy crisis in Europe, and risks from China including a growth slowdown, crackdown of tech companies, and the debt default of one of the largest property developers. Given these risks, for the time being, we recommend hedging EM currencies with the euro, as the two have been highly correlated.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Time to Hedge EM FX with Euro Again

<p>As the US dollar has strengthened this month, it has weighed on EM currencies. Several Asian currencies, in particular, have been among the worst performers, adjusted for their respective betas. Among them, Korean won has underperformed on a combination of low carry and FX interventions. The carry should rise as the central bank has started its tightening cycle, but it is likely to be gradual. Moreover, the recent missile test by North Korea and the lowering of the country's potential growth by the central bank have weighed on the currency. Our view is that the currency is now reflecting these risks and should gradually close its gap with the rest of EM.</p>

As the US dollar has strengthened this month, it has weighed on EM currencies. Several Asian currencies, in particular, have been among the worst performers, adjusted for their respective betas. Among them, Korean won has underperformed on a combination of low carry and FX interventions. The carry should rise as the central bank has started its tightening cycle, but it is likely to be gradual. Moreover, the recent missile test by North Korea and the lowering of the country's potential growth by the central bank have weighed on the currency. Our view is that the currency is now reflecting these risks and should gradually close its gap with the rest of EM.

FX Dashboard: Is Korean Won’s Underperformance Overdone?

<p>We revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.</p><p>Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.</p>

We revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

FX Dashboard: Is Monetary Policy Still Driving FX Returns?

Brazil

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

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Rates 10y Dashboard: Does the Curve Flattening in Brazil Offer an Opportunity?

With political uncertainty and fiscal slippage likely to rise heading into next year's presidential election, a curve steepener in Brazil offers an...

Gautam Jain, PhD, CFA

TMI Snapshot: Early Signs of Bottoming in Brazil Macro Sentiment

Our Brazil macro sentiment indicators are showing early signs of bottoming as we see improvement in the hydro crisis, "peak unrest" and other...

Elan Gore

FX Dashboard: Time to Hedge EM FX with Euro Again

Given the rising near-term risks to our view of the dollar trading in a range over the coming months, we recommend hedging EM currencies with the...

Gautam Jain, PhD, CFA

FX Dashboard: Is Korean Won’s Underperformance Overdone?

The Korean won has underperformed on a combination of low carry, FX interventions, and more recently, North Korea's missile test, which should all...

Gautam Jain, PhD, CFA

FX Dashboard: Is Monetary Policy Still Driving FX Returns?

We modify our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies to say...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

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