Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>The dollar has strengthened significantly since Russia's invasion of Ukraine, which has led to a broad risk-off environment. Among EM currencies, the worst performer has been the Hungarian forint. </li>
<li>Adding to the economic woes resulting from Russia's aggression, the forint has suffered as the central bank has signaled less aggressive monetary tightening even with inflation hitting a two-decade high.</li>
<li>PM Orban has worsened the situation with his pre-election spending and by going against the EU by resisting further sanctions on Russia. Relatedly, funding from the EU is at risk.</li>
</ul>


The dollar has strengthened significantly since Russia's invasion of Ukraine, which has led to a broad risk-off environment. Among EM currencies, the worst performer has been the Hungarian forint. 
Adding to the economic woes resulting from Russia's aggression, the forint has suffered as the central bank has signaled less aggressive monetary tightening even with inflation hitting a two-decade high.
PM Orban has worsened the situation with his pre-election spending and by going against the EU by resisting further sanctions on Russia. Relatedly, funding from the EU is at risk.


Which EM Currency Has Suffered the Most Since Russia’s Invasion of Ukraine?

<ul>
<li>In line with my view that the dollar remains strong in the near term, one of the trading strategies that I have suggested is relative-value trades within EM currencies.</li>
<li>The volatility of EM currencies continues to rise, which in theory is supportive of relative-value trades as such environments are usually accompanied by wide dispersion among EM currencies. </li>
<li>However, I find that cross-correlations among EM currencies have risen, leading to a narrowing of dispersion between them, which means the environment is no longer supportive of relative-value trades.</li>
</ul>


In line with my view that the dollar remains strong in the near term, one of the trading strategies that I have suggested is relative-value trades within EM currencies.
The volatility of EM currencies continues to rise, which in theory is supportive of relative-value trades as such environments are usually accompanied by wide dispersion among EM currencies. 
However, I find that cross-correlations among EM currencies have risen, leading to a narrowing of dispersion between them, which means the environment is no longer supportive of relative-value trades.


Is the Environment Supportive of EM FX Relative-Value Trades?

<ul>
<li>In line with my view of the dollar remains strong in the near term, one of the trading strategies that I have suggested hedging an EMFX portfolio with the euro.</li>
<li>I show that the hedge has performed well by breaking down and comparing the return of the hedged portfolio with the unhedged version.</li>
<li>For me to recommend taking off the euro hedge, we would need to see the volatility of US rates and the probability of recession falling. </li>
</ul>


In line with my view of the dollar remains strong in the near term, one of the trading strategies that I have suggested hedging an EMFX portfolio with the euro.
I show that the hedge has performed well by breaking down and comparing the return of the hedged portfolio with the unhedged version.
For me to recommend taking off the euro hedge, we would need to see the volatility of US rates and the probability of recession falling. 


How Well Is Hedging EM Currencies with the Euro Working?

<ul>
<li>As the US dollar approaches its highest level in a decade in line with my expectation, I reiterate my view of the dollar remaining strong in the near term.</li>
<li>The dollar spike coincides with the rise in US rates volatility, which makes sense as the market is trapped between Fed tightening and risk aversion arising from rising recession probability.</li>
<li>As the year progresses, I expect the dollar to weaken and the environment to turn supportive of EM currencies. Until then, I recommend relative-value trades and hedging with the euro.</li>
</ul>


As the US dollar approaches its highest level in a decade in line with my expectation, I reiterate my view of the dollar remaining strong in the near term.
The dollar spike coincides with the rise in US rates volatility, which makes sense as the market is trapped between Fed tightening and risk aversion arising from rising recession probability.
As the year progresses, I expect the dollar to weaken and the environment to turn supportive of EM currencies. Until then, I recommend relative-value trades and hedging with the euro.


Revisiting the US Dollar View and Its Implications for EM Currencies

<ul>
<li>The US dollar has strengthened this year in line with my expectation, but the surprise has been that EM currencies have performed well despite the dollar strengthening.</li>
<li>The solid EM FX performance is entirely due to Latin American currencies which have performed well due to their very high carry, attractive valuations, and positive political developments.</li>
<li>In the near term, I expect LatAm currencies to continue to perform well but the environment may change as the year progresses.</li>
</ul>


The US dollar has strengthened this year in line with my expectation, but the surprise has been that EM currencies have performed well despite the dollar strengthening.
The solid EM FX performance is entirely due to Latin American currencies which have performed well due to their very high carry, attractive valuations, and positive political developments.
In the near term, I expect LatAm currencies to continue to perform well but the environment may change as the year progresses.


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Which EM Currency Has Suffered the Most Since Russia’s Invasion of Ukraine?

Adding to the economic woes from Russia's aggression, the Hungarian forint has suffered as the central bank has signaled less aggressive monetary...

Gautam Jain, PhD, CFA

Is the Environment Supportive of EM FX Relative-Value Trades?

The rise in the volatility of EM currencies should in theory be supportive of relative-value trades, but of late, the dispersion between them is...

Gautam Jain, PhD, CFA

How Well Is Hedging EM Currencies with the Euro Working?

I go over the performance of one of the trading strategies that I have suggested in line with my view of the dollar remaining strong in the near...

Gautam Jain, PhD, CFA

Revisiting the US Dollar View and Its Implications for EM Currencies

As the US dollar approaches its highest level in a decade, I reiterate my view of the dollar remaining strong in the near term. As the year...

Gautam Jain, PhD, CFA

Latin American Currencies on Top

The US dollar has strengthened this year in line with my expectation, but the surprise has been that EM currencies have performed well, led by...

Gautam Jain, PhD, CFA

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