Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

The attached file is a snapshot of the 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. The analysis, therefore, is not a forecasting tool but to be used for identifying dislocations, which we loosely define as price moves that cannot be justified by fundamentals.

The attached file is a snapshot of the 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. The analysis, therefore, is not a forecasting tool but to be used for identifying dislocations, which we loosely define as price moves that cannot be justified by fundamentals.

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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.

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the<a href="https://www.bis.org/statistics/eer.htm" target="_blank" rel="noopener"> BIS</a> (April 2019) and national central banks (see <a href="https://gallery.mailchimp.com/948838a86ce72ab6d8019a39d/files/15f4d8a9-56a4-46fd-9d78-607e5fd523e6/4X_Global_Research_Nominal_Effective_Exchange_Rates_Monthly_seasonal_patterns.pdf" target="_blank" rel="noopener">Nominal Effective Exchange Rates: Monthly seasonal patterns</a>, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the BIS (April 2019) and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

Monthly Currency Seasonality: Down and Out?

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Emerging Market Currencies: Hopes and Realities

The Dollar has treaded water in the past three months, in line with our benign view that “forecasts of the Dollar’s demise as the world’s number one reserve currency are at best extremely premature, at worst unfounded”.Our fundamental perspective is that a structural shift out of Dollars remains unlikely near-term, regardless of the outcome of the Presidential and Senate elections on 3rd November. One reason is that other major reserve currencies such as the Euro, Sterling and Canadian Dollar – which account for a large share of the Dollar Nominal Effective Exchange Rate (NEER) – face a number of headwinds unlikely to dissipate materially any time soon.Moreover, in the past week the Chinese Renminbi NEER has been broadly unchanged, in line with our forecast that “the People’s Bank of China” is more likely in a first instance to […] ultimately arrest the currency’s climb”.   We acknowledge, however, that the outlook for the Dollar and equities in the days (and potentially weeks) following the US elections is shrouded in multiple levels of uncertainty, which has translated into lower not higher realized volatility. Since February the Dollar’s underlying performance has largely reflected its “safe-haven” status, in our view, with the Dollar NEER inversely correlated with the S&amp;P 500. However, this inverse correlation briefly broke down in June, September and mid-October.Our view is that an over-whelming victory for either candidate on 3rd November is more likely to buoy global risk appetite and thus weigh on the Dollar. Conversely, if the election result remains open-ended for a few days (or longer), uncertainty could weigh on market sentiment and perversely see the Dollar appreciate and market volatility tick up.The Dollar NEER has on average in the past decade been strongest in the month of November (+1.1%), but this is partly skewed by the Dollar’s 2.6% gain in November 2016. Moreover, monthly seasonality has, somewhat unsurprisingly, broken down this year and historical patterns are of little help in ascertaining how the Dollar may trade next month.

The Dollar has treaded water in the past three months, in line with our benign view that “forecasts of the Dollar’s demise as the world’s number one reserve currency are at best extremely premature, at worst unfounded”.Our fundamental perspective is that a structural shift out of Dollars remains unlikely near-term, regardless of the outcome of the Presidential and Senate elections on 3rd November. One reason is that other major reserve currencies such as the Euro, Sterling and Canadian Dollar – which account for a large share of the Dollar Nominal Effective Exchange Rate (NEER) – face a number of headwinds unlikely to dissipate materially any time soon.Moreover, in the past week the Chinese Renminbi NEER has been broadly unchanged, in line with our forecast that “the People’s Bank of China” is more likely in a first instance to […] ultimately arrest the currency’s climb”.   We acknowledge, however, that the outlook for the Dollar and equities in the days (and potentially weeks) following the US elections is shrouded in multiple levels of uncertainty, which has translated into lower not higher realized volatility. Since February the Dollar’s underlying performance has largely reflected its “safe-haven” status, in our view, with the Dollar NEER inversely correlated with the S&amp;P 500. However, this inverse correlation briefly broke down in June, September and mid-October.Our view is that an over-whelming victory for either candidate on 3rd November is more likely to buoy global risk appetite and thus weigh on the Dollar. Conversely, if the election result remains open-ended for a few days (or longer), uncertainty could weigh on market sentiment and perversely see the Dollar appreciate and market volatility tick up.The Dollar NEER has on average in the past decade been strongest in the month of November (+1.1%), but this is partly skewed by the Dollar’s 2.6% gain in November 2016. Moreover, monthly seasonality has, somewhat unsurprisingly, broken down this year and historical patterns are of little help in ascertaining how the Dollar may trade next month.

Mexico

The Mexican peso is the official currency of Mexico. 

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FX Dashboard - Feb 2, 2021

Attached is the daily FX Dashboard that highlights dislocations in EM currency markets with the objective of identifying the leaders and laggards.

Gautam Jain, PhD, CFA

FX Dashboard - Feb 1, 2021

Attached is the daily FX Dashboard that highlights dislocations in EM currency markets with the objective of identifying the leaders and laggards.

Gautam Jain, PhD, CFA

Monthly Currency Seasonality: Down and Out?

Covid-19 pandemic and national lockdowns in 2020 wreaked havoc with historical monthly seasonal patterns for developed and EM currencies. But what...

Olivier Desbarres

Emerging Market Currencies: Hopes and Realities

EM currencies appreciated vs USD and outperformed in fortnight following US elections but since then performance more differentiated. Consensus is...

Olivier Desbarres

US Dollar – Calm Before the Storm

Sleepy Dollar has done little in the past three months, beating to the inverse tune of US equities. But US presidential and senate elections on 3...

Olivier Desbarres

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