Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

The US dollar has weakened since the end of March, leaving it flat from the start of the year. If the dollar moves sideways for the time being, as we expect, then it should lead to a carry trade environment. We identify the best EM currencies for such an environment.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.

The US dollar has weakened since the end of March, leaving it flat from the start of the year. If the dollar moves sideways for the time being, as we expect, then it should lead to a carry trade environment. We identify the best EM currencies for such an environment.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: Which Currencies to Target in a Carry Trade Environment?

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Olivier Desbarres

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4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

The past week has seen a short-lived flurry of market price action, with daily volatility in the US Dollar and equities edging higher on 30th April and again on 4th May. However, volatility overall has remained subdued, particularly in the benchmark US 10-year Treasury yield. Moreover, the Dollar NEER and US 10-year yields – increasingly a bellwether for financial markets – remain firmly within their multi-week ranges while the S&amp;P 500 yesterday closed in the middle of a narrow 3-week range of just 1.8%. US markets are seemingly sitting on the fence at this juncture, unwilling to take material directional positions given the uncertain outlook for US and global inflation and central banks’ reaction functions.  However, the gradual 6bp fall in the US benchmark 10-year Treasury yield between 29th April and 5th May to about 1.58% and the flattening of the 2s5s and 2s10s yield curves alongside a 0.4% gain in the Dollar NEER is noteworthy.Our take is that markets may have become marginally less worried that the Fed will have no choice but to tighten monetary policy sooner than it has indicated despite expectations that year-on-year US CPI-inflation will rise further in coming months. Moreover, the inverse relationship between the “safe-haven” Dollar and riskier assets has remained strong. US macro data released in the past week have been strong enough to put a floor under the S&amp;P 500 but not strong enough to push it to new highs. Finally we think that markets, in particular real-money funds, have once again been paying greater attention to valuations, including the relative cheapness of the Dollar.Notably most of the other major NEERs have also traded in narrow ranges since early March and few have moved much in the past month. Central banks, particularly in Asia, have been willing and able to keep their currencies on a short leash in order to maintain export competitiveness and minimise inflationary or deflationary pressures.Within Asia, the Taiwan Dollar is looking expensive relative to the Korean Won, in our view.

The past week has seen a short-lived flurry of market price action, with daily volatility in the US Dollar and equities edging higher on 30th April and again on 4th May. However, volatility overall has remained subdued, particularly in the benchmark US 10-year Treasury yield. Moreover, the Dollar NEER and US 10-year yields – increasingly a bellwether for financial markets – remain firmly within their multi-week ranges while the S&amp;P 500 yesterday closed in the middle of a narrow 3-week range of just 1.8%. US markets are seemingly sitting on the fence at this juncture, unwilling to take material directional positions given the uncertain outlook for US and global inflation and central banks’ reaction functions.  However, the gradual 6bp fall in the US benchmark 10-year Treasury yield between 29th April and 5th May to about 1.58% and the flattening of the 2s5s and 2s10s yield curves alongside a 0.4% gain in the Dollar NEER is noteworthy.Our take is that markets may have become marginally less worried that the Fed will have no choice but to tighten monetary policy sooner than it has indicated despite expectations that year-on-year US CPI-inflation will rise further in coming months. Moreover, the inverse relationship between the “safe-haven” Dollar and riskier assets has remained strong. US macro data released in the past week have been strong enough to put a floor under the S&amp;P 500 but not strong enough to push it to new highs. Finally we think that markets, in particular real-money funds, have once again been paying greater attention to valuations, including the relative cheapness of the Dollar.Notably most of the other major NEERs have also traded in narrow ranges since early March and few have moved much in the past month. Central banks, particularly in Asia, have been willing and able to keep their currencies on a short leash in order to maintain export competitiveness and minimise inflationary or deflationary pressures.Within Asia, the Taiwan Dollar is looking expensive relative to the Korean Won, in our view.

Sitting on Range-Trade Fence: Complacent Comfort

In this note, we highlight the widening performance gap between commodities and EM currencies along with going over the reasons behind it and the timing when it can start reversing.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 the broad market.

In this note, we highlight the widening performance gap between commodities and EM currencies along with going over the reasons behind it and the timing when it can start reversing.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 the broad market.

FX Dashboard: Divergence Between Commodities and EM Currencies Grows

The Federal Reserve has in the past six weeks diligently stuck to its “patience until substantial further progress is seen” monetary policy mantra. Its “reward” has been range-bound US Treasury yields, a slowly depreciating Dollar and a metronomic rise in US equity indices, with all three financial markets exhibiting only modest volatility.Since 19th April the Dollar NEER has depreciated a further 0.6% to within striking distance of a 14-week low, in line with “our core scenario that the Dollar will indeed lose further ground”. We remain bearish the US Dollar, a theme we will explore in greater detail in forthcoming FIRMS reports.Fed Chairperson Powell would argue that keeping US Treasury yields in check has been a worthy achievement given the backdrop of President Biden’s ambitious fiscal stimulus plans and accelerating US economic growth and rising domestic and global inflation. A GDP-weighted measure of headline CPI-inflation in 32 major economies rose to 2.1% yoy in March from 1.4% yoy in February, the largest monthly increase since December 2009. But core CPI-inflation in developed economies rose only marginally in Q1 2021, with the rate of inflation in March of 1.2% yoy below its 10-year average of 1.5% yoy.While backward looking these data they may explain in part why developed central banks, with the exception of Bank of Canada, have so far felt justified in keeping their policy rates on hold and the modalities of their asset-purchase programs broadly unchanged. In the past month currencies in Emerging Europe, Africa and Latin America have been main beneficiaries of still reasonably low US yields, weakening Dollar, burgeoning global growth and robust risk appetite. The timing of this EM rebound has coincided with our forecasts.Non-Japan Asian currencies have lagged, which we attribute in part to portfolio outflows and NJA central banks keeping a close eye on a flat-lining Chinese Renminbi.This differentiated EM currency rally will extend near-term, in our view, but high-yielding EM currencies in particular remain vulnerable to any spikes in US and other developed market government bond yields and more generally market volatility.

The Federal Reserve has in the past six weeks diligently stuck to its “patience until substantial further progress is seen” monetary policy mantra. Its “reward” has been range-bound US Treasury yields, a slowly depreciating Dollar and a metronomic rise in US equity indices, with all three financial markets exhibiting only modest volatility.Since 19th April the Dollar NEER has depreciated a further 0.6% to within striking distance of a 14-week low, in line with “our core scenario that the Dollar will indeed lose further ground”. We remain bearish the US Dollar, a theme we will explore in greater detail in forthcoming FIRMS reports.Fed Chairperson Powell would argue that keeping US Treasury yields in check has been a worthy achievement given the backdrop of President Biden’s ambitious fiscal stimulus plans and accelerating US economic growth and rising domestic and global inflation. A GDP-weighted measure of headline CPI-inflation in 32 major economies rose to 2.1% yoy in March from 1.4% yoy in February, the largest monthly increase since December 2009. But core CPI-inflation in developed economies rose only marginally in Q1 2021, with the rate of inflation in March of 1.2% yoy below its 10-year average of 1.5% yoy.While backward looking these data they may explain in part why developed central banks, with the exception of Bank of Canada, have so far felt justified in keeping their policy rates on hold and the modalities of their asset-purchase programs broadly unchanged. In the past month currencies in Emerging Europe, Africa and Latin America have been main beneficiaries of still reasonably low US yields, weakening Dollar, burgeoning global growth and robust risk appetite. The timing of this EM rebound has coincided with our forecasts.Non-Japan Asian currencies have lagged, which we attribute in part to portfolio outflows and NJA central banks keeping a close eye on a flat-lining Chinese Renminbi.This differentiated EM currency rally will extend near-term, in our view, but high-yielding EM currencies in particular remain vulnerable to any spikes in US and other developed market government bond yields and more generally market volatility. 

In this note, we compare the performance of Latin American and Asian currencies as the former had started outperforming earlier this month but the latter has since caught up. The performance gap between the two remains at its widest in 10 years.Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where 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 the broad market.

In this note, we compare the performance of Latin American and Asian currencies as the former had started outperforming earlier this month but the latter has since caught up. The performance gap between the two remains at its widest in 10 years.Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where 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 the broad market.

FX Dashboard: LatAm FX Outperformance Versus Asia Did Not Last

Indonesia

The Indonesian rupiah is the official currency of the Republic of Indonesia. 

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FX Dashboard: Which Currencies to Target in a Carry Trade Environment?

If the dollar moves sideways for the time being, as we expect, then it should lead to a carry trade environment. We identify the best EM currencies...

Gautam Jain, PhD, CFA

Sitting on Range-Trade Fence: Complacent Comfort

Vol & directionality in Dollar, Treasuries and S&P 500 modest in past week and most EM currencies remain rangebound. Markets sitting on fence, but...

Olivier Desbarres

FX Dashboard: Divergence Between Commodities and EM Currencies Grows

In this note, we highlight the widening performance gap between commodities and EM currencies along with going over the reasons behind it and the...

Gautam Jain, PhD, CFA

Something Has Got to Give

Treasury yields have been range-bound despite global backdrop of stronger growth and rising inflation. USD weaker, equities and (most) EM...

Olivier Desbarres

FX Dashboard: LatAm FX Outperformance Versus Asia Did Not Last

We compare the performance of Latin American and Asian currencies as the latter has caught up to the former. However, the performance gap between...

Gautam Jain, PhD, CFA

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