Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

With the dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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.

With the dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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: Winners and Losers in EM FX Amidst Dollar Strengthening

Research Analyst

Ilvin Cornelis

Thematic (Sector/Industry)

I really like these eight banks – <a href="https://www.smartkarma.com/entities/bank-rakyat-indonesia-persero" target="_blank" data-smartkarma-citation="entities:484:1" rel="noopener">Bank Rakyat Indonesia Persero (BBRI IJ)</a>, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri Persero (BMRI IJ)</a>, <a href="https://www.smartkarma.com/entities/bank-negara-indonesia-persero" target="_blank" data-smartkarma-citation="entities:8285:1" rel="noopener">Bank Negara Indonesia Persero (BBNI IJ),</a><a href="https://www.smartkarma.com/entities/bank-tabungan-negara-persero" target="_blank" data-smartkarma-citation="entities:731:1" rel="noopener">Bank Tabungan Negara Persero (BBTN IJ), </a><a href="https://www.smartkarma.com/entities/bpd-jawa-barat-dan-banten-tb" target="_blank" data-smartkarma-citation="entities:134:1" rel="noopener">Bank BJB (BJBR IJ)</a><a href="https://www.smartkarma.com/entities/bank-tabungan-negara-persero" target="_blank" data-smartkarma-citation="entities:731:1" rel="noopener"> </a>, <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ), </a><a href="https://www.smartkarma.com/entities/bank-danamon-indonesia-tbk-pt" target="_blank" data-smartkarma-citation="entities:135:1" rel="noopener">Bank Danamon Indonesia (BDMN IJ)</a>, and <a href="https://www.smartkarma.com/entities/bank-pan-indonesia-tbk-pt" target="_blank" data-smartkarma-citation="entities:727:1" rel="noopener">Bank Pan Indonesia (PNBN IJ)</a>, mainly due to their reasonable valuations, coupled with their ability to attract more deposits from customers.
Many of these banks are still trading below, or at least in line, with their historical 3-year average PBRs. Given my expectation of profitability improvements over the next 3 years, their current valuations are still reasonably attractive.

I really like these eight banks – Bank Rakyat Indonesia Persero (BBRI IJ), Bank Mandiri Persero (BMRI IJ), Bank Negara Indonesia Persero (BBNI IJ),Bank Tabungan Negara Persero (BBTN IJ), Bank BJB (BJBR IJ) , Bank Central Asia (BBCA IJ), Bank Danamon Indonesia (BDMN IJ), and Bank Pan Indonesia (PNBN IJ), mainly due to their reasonable valuations, coupled with their ability to attract more deposits from customers.
Many of these banks are still trading below, or at least in line, with their historical 3-year average PBRs. Given my expectation of profitability improvements over the next 3 years, their current valuations are still reasonably attractive.

Indonesia's Banking Sector: The Eight Bank Stocks to Watch For

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.

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

With the US dollar and EM currencies on aggregate trading in a range for much of the year, their volatilities have dropped to the lowest level since the start of the pandemic. Since a drop in volatility engenders a carry-trade environment, we test this hypothesis on EM currencies and conclude that indeed currencies with high risk-adjusted carry have been outperforming, and vice versa. A currency that we continue to like from the perspective of improving carry is the Chilean peso.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.

With the US dollar and EM currencies on aggregate trading in a range for much of the year, their volatilities have dropped to the lowest level since the start of the pandemic. Since a drop in volatility engenders a carry-trade environment, we test this hypothesis on EM currencies and conclude that indeed currencies with high risk-adjusted carry have been outperforming, and vice versa. A currency that we continue to like from the perspective of improving carry is the Chilean peso.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: Are EM Currencies in a Carry-Trade Environment?

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

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.

In the past couple of months governments in Asia-Pacific have materially accelerated the administration of Covid-19 vaccines.But because of low starting points, vaccination rates remain low compared to the EU, US and UK and even a number EM economies (including Turkey). The exceptions are Korea, Malaysia and Japan which have now administered a similar number of doses per capita as the US, while Singapore has pulled further ahead. In countries where governments started to vaccinate early such as the US and in particular the UK, vaccine roll-outs have slowed materially in the past nine weeks. These countries are taking additional measures to encourage those not yet vaccinated to do so and there is talk of jabs for under-18s and of booster jabs at least for the most vulnerable.The picture for the increase in Covid-19 deaths since early July is even more granular. In countries where governments started vaccinating early and now have high rates of vaccination, including the UK, US and EU, the number of deaths has perhaps unsurprisingly increased only marginally. The rate of increase and total number of deaths remain negligible in New Zealand despite a sill modest vaccination roll-out. It has to varying degrees been a similar situation in Australia, Korea, Japan, Singapore and Taiwan.The increase in deaths has also been modest in India and Philippines, albeit from a higher starting point. The increase in deaths has been far higher in Indonesia, Malaysia and in particular Thailand.  Vaccination rates are a critical variable from a health and economic perspective but their direct impact on currencies has been mixed.New Zealand Dollar has outperformed but is not particularly expensive in our view. Going forward we would expect it to remain well supported even if still vulnerable to pull-backs.

In the past couple of months governments in Asia-Pacific have materially accelerated the administration of Covid-19 vaccines.But because of low starting points, vaccination rates remain low compared to the EU, US and UK and even a number EM economies (including Turkey). The exceptions are Korea, Malaysia and Japan which have now administered a similar number of doses per capita as the US, while Singapore has pulled further ahead. In countries where governments started to vaccinate early such as the US and in particular the UK, vaccine roll-outs have slowed materially in the past nine weeks. These countries are taking additional measures to encourage those not yet vaccinated to do so and there is talk of jabs for under-18s and of booster jabs at least for the most vulnerable.The picture for the increase in Covid-19 deaths since early July is even more granular. In countries where governments started vaccinating early and now have high rates of vaccination, including the UK, US and EU, the number of deaths has perhaps unsurprisingly increased only marginally. The rate of increase and total number of deaths remain negligible in New Zealand despite a sill modest vaccination roll-out. It has to varying degrees been a similar situation in Australia, Korea, Japan, Singapore and Taiwan.The increase in deaths has also been modest in India and Philippines, albeit from a higher starting point. The increase in deaths has been far higher in Indonesia, Malaysia and in particular Thailand.  Vaccination rates are a critical variable from a health and economic perspective but their direct impact on currencies has been mixed.New Zealand Dollar has outperformed but is not particularly expensive in our view. Going forward we would expect it to remain well supported even if still vulnerable to pull-backs.

Indonesia

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

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FX Dashboard: Winners and Losers in EM FX Amidst Dollar Strengthening

In the latest bout of dollar strengthening, we go over the outperformers and underperformers among EM currencies to identify potential trading...

Gautam Jain, PhD, CFA

Indonesia's Banking Sector: The Eight Bank Stocks to Watch For

These eight banks have reasonable valuations and stand ready to benefit from stronger loan demand and rising interest rates, over the medium term.

Ilvin Cornelis

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: Are EM Currencies in a Carry-Trade Environment?

As the volatilities of the US dollar and EM currencies have dropped, we test the hypothesis and conclude that EM FX is in a carry-trade...

Gautam Jain, PhD, CFA

Vaccination and Currency Immunity

Vaccination rates matter but for some Asia-Pacific countries, economies and currencies they are not proving to be a panacea.

Olivier Desbarres

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