Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

In this note, we go over the reasons that Latin American currencies have started outperforming against their Asian counterparts, a trend we expect to continue with a range-bound dollar.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 go over the reasons that Latin American currencies have started outperforming against their Asian counterparts, a trend we expect to continue with a range-bound dollar.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 Has Started Outperforming Against Asia FX

In this note, we evaluate whether hedging with the euro would have helped ameliorate losses from EM currencies over the past couple of months stemming from the spillover from rising US rates.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 evaluate whether hedging with the euro would have helped ameliorate losses from EM currencies over the past couple of months stemming from the spillover from rising US rates.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: How Well Would a Euro Hedge Have Worked for EM?

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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.

Non-Japan Asian (NJA) central banks’ foreign currency (FX) reserves have gradually increased since end-March 2020, arguably the peak in global risk aversion.We estimate that the aggregate US Dollar-value of FX reserves in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand increased by about $514bn or 10% in the eleven months to end-February 2021 to about $5.66 trillion. This was just $122bn short of all the all-time high recorded in June-2014.Adjusting for currency-valuation effects – the appreciation of other major reserve currencies versus the US Dollar – we estimate that these NJA central banks’ FX reserves increased by about $342bn or 6.4%. As a percentage of GDP, this increase amounted to about 1.5% for NJA, ranging from only 0.3% in China to nearly 28% in Singapore. While realised investment gains on these central banks’ holdings and other official transactions may have inflated this increase in FX reserves, it was at least partly the result of central banks’ intervention in the FX market (i.e. buying foreign currency), in our view. Importantly, NJA central banks rightly attach greater importance to their currencies’ more relevant Nominal Effective Exchange Rates (NEERs), when setting their exchange rate and interest rate policies, than to their currency’s bilateral exchange rates, in our view.In the past 11 months NJA central banks have continued to show an ability and willingness to both limit daily FX volatility and influence their NEERs’ medium-term directionality.FX reserve accumulation has either capped the pace of appreciation (CNY, IDR, KRW, THB, TWD) or contributed to (albeit modest in most cases) NEER depreciation (INR, MYR, PHP) with NJA central banks seemingly intent on maintaining export competitiveness and limiting imported deflation. The Singapore Dollar NEER was unchanged over this period.Of course the past and future performance of individual currencies is conditioned by both the magnitude of central bank FX intervention AND current account and capital account flows (and the underlying factors behind these policies and FX flows) – the topic of Part Two of this FIRMS report.

Non-Japan Asian (NJA) central banks’ foreign currency (FX) reserves have gradually increased since end-March 2020, arguably the peak in global risk aversion.We estimate that the aggregate US Dollar-value of FX reserves in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand increased by about $514bn or 10% in the eleven months to end-February 2021 to about $5.66 trillion. This was just $122bn short of all the all-time high recorded in June-2014.Adjusting for currency-valuation effects – the appreciation of other major reserve currencies versus the US Dollar – we estimate that these NJA central banks’ FX reserves increased by about $342bn or 6.4%. As a percentage of GDP, this increase amounted to about 1.5% for NJA, ranging from only 0.3% in China to nearly 28% in Singapore. While realised investment gains on these central banks’ holdings and other official transactions may have inflated this increase in FX reserves, it was at least partly the result of central banks’ intervention in the FX market (i.e. buying foreign currency), in our view. Importantly, NJA central banks rightly attach greater importance to their currencies’ more relevant Nominal Effective Exchange Rates (NEERs), when setting their exchange rate and interest rate policies, than to their currency’s bilateral exchange rates, in our view.In the past 11 months NJA central banks have continued to show an ability and willingness to both limit daily FX volatility and influence their NEERs’ medium-term directionality.FX reserve accumulation has either capped the pace of appreciation (CNY, IDR, KRW, THB, TWD) or contributed to (albeit modest in most cases) NEER depreciation (INR, MYR, PHP) with NJA central banks seemingly intent on maintaining export competitiveness and limiting imported deflation. The Singapore Dollar NEER was unchanged over this period.Of course the past and future performance of individual currencies is conditioned by both the magnitude of central bank FX intervention AND current account and capital account flows (and the underlying factors behind these policies and FX flows) – the topic of Part Two of this FIRMS report. 

Non-Japan Asia: NEERs and FX Intervention

In the past nine weeks major currencies and global equity markets have traded broadly in line with our expectations. The US Dollar has traded in a very narrow range, confounding consistently bearish market expectations. Similarly, most emerging Asian currencies have barely moved, pointing to the ability and willingness of Asian central bank to intervene in FX markets in a bid to manage both the volatility and directionality of their currencies. Conversely, emerging currencies, particularly in Latin America, have been prone to sharp pull-backs.Stretched currency valuations and still very weak global economic growth in January – which tallies with our forecast – has likely been a driver of currencies’ performance. In the past five weeks the inverse correlation between the Dollar and S&amp;P 500 and between the Dollar and the steepness of the US Treasury yield curve has broken down.Our take is that the broad-based diversification out of Dollars, driven by buoyant global risk appetite and market concerns about the Dollar’s real carry, has stalled and slightly reversed. We suspect that central banks and sovereign wealth funds may have re-focussed on domestic factors, which has in turn led to a rotation between other reserve currencies. This includes a rotation out of Euros and move into Sterling and a rotation out of the safe haven Swiss Franc and in particular Japanese Yen into commodity reserve currencies – namely the Canadian and Australian Dollars and Norwegian Krone – and New Zealand Dollar. These four currencies’ NEERs are now near the top end of their three-month ranges. In each case specific drivers have been in play, “in our view. Our analysis suggests that the Norwegian Krone may still be “cheap” relative to the current price of Brent crude oil.Figure 8 suggests that a rotation in and out of other (EM) currencies which were 1-2 months ago trading at the extremes of their ranges may have also taken place.The Dollar NEER has weakened about 0.9% since 4th February and its inverse correlation with the S&amp;P 500 (+1.2%) has re-established itself. We think this is a short-term correction, with another prolonged Dollar downtrend still a couple of months away.

In the past nine weeks major currencies and global equity markets have traded broadly in line with our expectations. The US Dollar has traded in a very narrow range, confounding consistently bearish market expectations. Similarly, most emerging Asian currencies have barely moved, pointing to the ability and willingness of Asian central bank to intervene in FX markets in a bid to manage both the volatility and directionality of their currencies. Conversely, emerging currencies, particularly in Latin America, have been prone to sharp pull-backs.Stretched currency valuations and still very weak global economic growth in January – which tallies with our forecast – has likely been a driver of currencies’ performance. In the past five weeks the inverse correlation between the Dollar and S&amp;P 500 and between the Dollar and the steepness of the US Treasury yield curve has broken down.Our take is that the broad-based diversification out of Dollars, driven by buoyant global risk appetite and market concerns about the Dollar’s real carry, has stalled and slightly reversed. We suspect that central banks and sovereign wealth funds may have re-focussed on domestic factors, which has in turn led to a rotation between other reserve currencies. This includes a rotation out of Euros and move into Sterling and a rotation out of the safe haven Swiss Franc and in particular Japanese Yen into commodity reserve currencies – namely the Canadian and Australian Dollars and Norwegian Krone – and New Zealand Dollar. These four currencies’ NEERs are now near the top end of their three-month ranges. In each case specific drivers have been in play, “in our view. Our analysis suggests that the Norwegian Krone may still be “cheap” relative to the current price of Brent crude oil.Figure 8 suggests that a rotation in and out of other (EM) currencies which were 1-2 months ago trading at the extremes of their ranges may have also taken place.The Dollar NEER has weakened about 0.9% since 4th February and its inverse correlation with the S&amp;P 500 (+1.2%) has re-established itself. We think this is a short-term correction, with another prolonged Dollar downtrend still a couple of months away.

Dollar’s Recent Weakness – Blip, Not New Trend

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>, 10th 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. Identifying monthly seasonal patterns and why they may break down (significant changes in central bank or government policy, market positioning, macro data surprises and unexpected domestic events) can thus potentially augment investment returns and generate alpha.Unsurprisingly the Covid-19 pandemic – a once-in-a-lifetime “black swan” event – and accompanying measures such as national lockdowns severely disrupted typical monthly seasonal currency patterns in 2020, particularly in March and June (the trough and peak in global risk appetite) but also in Q4, with a few exceptions (see <a href="https://www.smartkarma.com/insights/monthly-currency-seasonality-down-and-out" target="_blank" rel="noopener">Monthly currency seasonality: Down and out?</a>, 4th January 2021). A number of emerging and developed market currencies continued to deviate from their 2010-2019 historical patterns in January 2021. In particular the “normally” strong Brazilian Real and to a lesser extent Colombian Peso and Polish Zloty depreciated. The Swiss Franc, contrary to history and in line with our forecast, also weakened slightly. The South African Rand depreciated 2.1%, five times as much as its 11-year historical average.Conversely the “normally” weak Turkish Lira was the outperformer, with the NEER appreciating nearly 4%. Sterling, the Australian Dollar and Norwegian Krone also outperformed in January relative to their historical seasonal patterns. However, and while early days, about 17 currencies, including the Dollar, Euro, Kiwi Dollar, Mexican Peso and most Asian currencies performed in line with their historical seasonality.Based on 2010-19 data Thai Baht, Norwegian Krone, Hungarian Forint and Polish Zloty were strongest currencies in the month of February while Korean Won was the weakest.

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 theBIS (April 2019) and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10th 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. Identifying monthly seasonal patterns and why they may break down (significant changes in central bank or government policy, market positioning, macro data surprises and unexpected domestic events) can thus potentially augment investment returns and generate alpha.Unsurprisingly the Covid-19 pandemic – a once-in-a-lifetime “black swan” event – and accompanying measures such as national lockdowns severely disrupted typical monthly seasonal currency patterns in 2020, particularly in March and June (the trough and peak in global risk appetite) but also in Q4, with a few exceptions (see Monthly currency seasonality: Down and out?, 4th January 2021). A number of emerging and developed market currencies continued to deviate from their 2010-2019 historical patterns in January 2021. In particular the “normally” strong Brazilian Real and to a lesser extent Colombian Peso and Polish Zloty depreciated. The Swiss Franc, contrary to history and in line with our forecast, also weakened slightly. The South African Rand depreciated 2.1%, five times as much as its 11-year historical average.Conversely the “normally” weak Turkish Lira was the outperformer, with the NEER appreciating nearly 4%. Sterling, the Australian Dollar and Norwegian Krone also outperformed in January relative to their historical seasonal patterns. However, and while early days, about 17 currencies, including the Dollar, Euro, Kiwi Dollar, Mexican Peso and most Asian currencies performed in line with their historical seasonality.Based on 2010-19 data Thai Baht, Norwegian Krone, Hungarian Forint and Polish Zloty were strongest currencies in the month of February while Korean Won was the weakest.

Malaysia

The Malaysian ringgit is the official currency of the Federation of Malaysia. 

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FX Dashboard: LatAm FX Has Started Outperforming Against Asia FX

In this note, we go over the reasons that Latin American currencies have started outperforming against their Asian counterparts, a trend we expect...

Gautam Jain, PhD, CFA

FX Dashboard: How Well Would a Euro Hedge Have Worked for EM?

In this note, we evaluate whether hedging with the euro would have helped ameliorate losses from EM currencies over the past couple of months...

Gautam Jain, PhD, CFA

Non-Japan Asia: NEERs and FX Intervention

Non-Japan Asian central banks have in past year intervened in FX market to cap FX volatility, protect export competitiveness and limit imported...

Olivier Desbarres

Dollar’s Recent Weakness – Blip, Not New Trend

In past 2 months range-bound USD and Asian currencies, pull-back prone EM currencies and buoyant equities have performed in line with our forecast....

Olivier Desbarres

Currency Seasonality’s Slow Comeback?

Identifying currencies' monthly seasonal patterns and why they may break down can potentially generate alpha. Seasonal patterns broke down in 2020...

Olivier Desbarres

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