Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

EM currencies have broadly lagged the rally in commodities this year, but there are signs that this may be changing for at least two of the oil currencies. The Russian ruble has been weighed down by the sanction risk and FX interventions to meet the fiscal rule. The Colombian peso, meanwhile, suffered on the back of the deteriorating fiscal balance and anti-government protests earlier this year. More recently, however, the correlation of both currencies with oil has picked up, leading to them outperforming the broad EM FX universe. If oil prices stay at a high level, it bodes well for both currencies.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.

EM currencies have broadly lagged the rally in commodities this year, but there are signs that this may be changing for at least two of the oil currencies. The Russian ruble has been weighed down by the sanction risk and FX interventions to meet the fiscal rule. The Colombian peso, meanwhile, suffered on the back of the deteriorating fiscal balance and anti-government protests earlier this year. More recently, however, the correlation of both currencies with oil has picked up, leading to them outperforming the broad EM FX universe. If oil prices stay at a high level, it bodes well for both currencies.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: Russian Ruble and Colombian Peso Finally Benefiting from the Oil Rally

Following the hawkish surprise at the last meeting, the Chilean central bank is likely to raise the pace of tightening even further at the MPC meeting tomorrow. Inflation has been rising steadily as the recovery picked up strongly on the back of the strong fiscal and monetary stimulus. More worrisome for the central bank is that long-term inflation expectations have deteriorated. The currency depreciation meanwhile has picked up pace as political uncertainty has risen, adding to inflationary risks. The central bank is thus likely to raise rates very aggressively to anchor inflation expectations and the currency in our view and is possibly evaluating a currency intervention program. Our bullish recommendations on the currency have taken a hit lately.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.

Following the hawkish surprise at the last meeting, the Chilean central bank is likely to raise the pace of tightening even further at the MPC meeting tomorrow. Inflation has been rising steadily as the recovery picked up strongly on the back of the strong fiscal and monetary stimulus. More worrisome for the central bank is that long-term inflation expectations have deteriorated. The currency depreciation meanwhile has picked up pace as political uncertainty has risen, adding to inflationary risks. The central bank is thus likely to raise rates very aggressively to anchor inflation expectations and the currency in our view and is possibly evaluating a currency intervention program. Our bullish recommendations on the currency have taken a hit lately.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: Chilean Central Bank Is Set to Deliver Another Hawkish Surprise

With the US dollar appreciating on rising risk aversion, it is important to see which EM currencies are more vulnerable and which are less if the dollar strengthening continues. To do so, we look at the systematic risk or beta of each EM currency and how it has evolved. We find that the beta has increased for Central European currencies and Asian currencies with the exception of the Indonesian rupiah and the Indian rupee. It has also increased for the Turkish lira but has dropped for the Mexican peso and the Russian ruble, providing us with a template of which currencies to go long or short.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 appreciating on rising risk aversion, it is important to see which EM currencies are more vulnerable and which are less if the dollar strengthening continues. To do so, we look at the systematic risk or beta of each EM currency and how it has evolved. We find that the beta has increased for Central European currencies and Asian currencies with the exception of the Indonesian rupiah and the Indian rupee. It has also increased for the Turkish lira but has dropped for the Mexican peso and the Russian ruble, providing us with a template of which currencies to go long or short.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: How Have the Sensitivities of EM FX to US Dollar Evolved?

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

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.

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?

Israel

The Israeli shekel is the official currency of the state of Israel. the US dollar is the official currency of the United states of America

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FX Dashboard: Russian Ruble and Colombian Peso Finally Benefiting from the Oil Rally

After lagging the rally in oil since the start of the pandemic, the Russian ruble and the Colombian peso have started to correlate better with oil...

Gautam Jain, PhD, CFA

FX Dashboard: Chilean Central Bank Is Set to Deliver Another Hawkish Surprise

Following the substantial deterioration of long-term inflation expectations along with the sharp currency depreciation, we expect the central bank...

Gautam Jain, PhD, CFA

FX Dashboard: How Have the Sensitivities of EM FX to US Dollar Evolved?

We look at the systematic risk or beta of each EM currency to the US dollar and how it has evolved to identify currencies that are more or less...

Gautam Jain, PhD, CFA

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

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52-week Range

Market Cap (USDm)

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