Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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

<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

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<ul>
<li>Last week's spike in US asset prices, including US Treasuries, in the wake of gangbuster US CPI-inflation data for October, has proved short-lived.  </li>
<li>However, EM currencies have outperformed developed currencies since 1st November thanks partly to EM central bank policy rate hikes, a lack of currency contagion and domestic macro data.</li>
<li>We focus on low-volatility Asian currencies, the under-pressure Norwegian Krone, Polish Zloty,  Hungarian Forint and Euro and the importance of the release of UK retail sales data on Friday.</li>
</ul>


Last week's spike in US asset prices, including US Treasuries, in the wake of gangbuster US CPI-inflation data for October, has proved short-lived.  
However, EM currencies have outperformed developed currencies since 1st November thanks partly to EM central bank policy rate hikes, a lack of currency contagion and domestic macro data.
We focus on low-volatility Asian currencies, the under-pressure Norwegian Krone, Polish Zloty,  Hungarian Forint and Euro and the importance of the release of UK retail sales data on Friday.


FX Round-Up – Calm Before the Next Storm

Brazil

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

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BRL (USDBRL CURNCY)

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

FX Round-Up – Calm Before the Next Storm

Interest rate and FX vol has subsided with directionality in EM and developed market currencies driven by domestic macro data and monetary...

Olivier Desbarres

Price Gauge

52-week Range

Market Cap (USDm)

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