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

<ul>
<li>The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.</li>
<li>In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. </li>
<li>In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.</li>
</ul>


The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.
In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. 
In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.


South African Rand – Watch for Headwinds in 2022

<ul>
<li>I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which currencies may offer opportunities this year.</li>
<li>The currencies to track this year for opportunities to buy are Chilean peso and Peruvian sol, and to sell are Colombian peso and South African rand. </li>
<li>Among currencies that already look appealing to buy are the Indian rupee and the Thai baht, while the Chinese yuan and the Czech koruna appear expensive.</li>
</ul>


I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which currencies may offer opportunities this year.
The currencies to track this year for opportunities to buy are Chilean peso and Peruvian sol, and to sell are Colombian peso and South African rand. 
Among currencies that already look appealing to buy are the Indian rupee and the Thai baht, while the Chinese yuan and the Czech koruna appear expensive.


Not All Winners Are Equal: 2021 EM FX Outliers and Implications for 2022

<ul>
<li>I reiterate the risk that the dollar can strengthen in the near term by being on one of the two ends of the dollar smile, thus weighing on EM currencies.</li>
<li>On the positive side, the dollar strengthening should not last since the currency is already expensive in REER terms. Also, long speculative positions in the dollar are already quite heavy.</li>
<li>Since positions tend to follow dollar moves, whenever the dollar starts weakening, the unwinding of long positions can exacerbate the move, making it a supportive environment for EM currencies.</li>
</ul>


I reiterate the risk that the dollar can strengthen in the near term by being on one of the two ends of the dollar smile, thus weighing on EM currencies.
On the positive side, the dollar strengthening should not last since the currency is already expensive in REER terms. Also, long speculative positions in the dollar are already quite heavy.
Since positions tend to follow dollar moves, whenever the dollar starts weakening, the unwinding of long positions can exacerbate the move, making it a supportive environment for EM currencies.


Speculative Long Dollar Positions Highest Since 2019

Colombia

The Colombian peso is the official currency of the Republic of Colombia

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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

South African Rand – Watch for Headwinds in 2022

In 2022, I expect the South African rand to underperform on the back of a weak economic outlook, low carry relative to its volatility, and the...

Gautam Jain, PhD, CFA

Not All Winners Are Equal: 2021 EM FX Outliers and Implications for 2022

I explore the 2021 winners and losers among EM currencies, leading into the discussion on which of these performances were appropriate and which...

Gautam Jain, PhD, CFA

Speculative Long Dollar Positions Highest Since 2019

Long speculative positions in the dollar are quite heavy implying that whenever the dollar starts weakening, the unwinding of long positions can...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)