Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>In this week’s Alpha Bites, I recommend closing the cross-country rates trade to pay Poland 5y against receiving Czech 5y rate, a recommendation I made in July.</li>
<li>I had recommended the trade because the Polish central bank was behind the curve in addressing accelerating inflation, which it is attempting to correct now by hiking aggressively.</li>
<li>With the Czech central bank having been hawkish and ahead of the curve, the rate differential between the two is narrowing as rates in Poland rise.</li>
</ul>


In this week’s Alpha Bites, I recommend closing the cross-country rates trade to pay Poland 5y against receiving Czech 5y rate, a recommendation I made in July.
I had recommended the trade because the Polish central bank was behind the curve in addressing accelerating inflation, which it is attempting to correct now by hiking aggressively.
With the Czech central bank having been hawkish and ahead of the curve, the rate differential between the two is narrowing as rates in Poland rise.


Alpha Bites: Take Profits on Receive Czech 5y Vs Pay Poland 5y Rate

<ul>
<li>US yields have jumped higher and the US dollar has strengthened on the back of higher-than-expected inflation prints and speculation of change at the Fed's helm.</li>
<li>EM rates have also moved higher as their correlation with US rates is currently on the high end of the historical range.</li>
<li>The bout of volatility has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their performance relative to their respective betas.</li>
</ul>


US yields have jumped higher and the US dollar has strengthened on the back of higher-than-expected inflation prints and speculation of change at the Fed's helm.
EM rates have also moved higher as their correlation with US rates is currently on the high end of the historical range.
The bout of volatility has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their performance relative to their respective betas.


Outliers Within EM Rates Amid Rising Volatility of US Rates

Poland's central bank surprised the market with an aggressive rate hike of 75 bp last week when the expectation was for 25 bp. This action supported my long-held recommendation to pay Poland 5y against receiving Czech 5y rate. However, I recommend holding on to the trade as the central bank remains behind the curve with inflation continuing to be a concern. Moreover, the government is adding further fiscal stimulus, which should be inflationary as well. Finally, Poland's ongoing row with the EU may result in the latter withholding funds, which if it were to happen would be negative for all Polish assets.Separately, the attached file is a snapshot of the EM 10y rates market in which I seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Poland's central bank surprised the market with an aggressive rate hike of 75 bp last week when the expectation was for 25 bp. This action supported my long-held recommendation to pay Poland 5y against receiving Czech 5y rate. However, I recommend holding on to the trade as the central bank remains behind the curve with inflation continuing to be a concern. Moreover, the government is adding further fiscal stimulus, which should be inflationary as well. Finally, Poland's ongoing row with the EU may result in the latter withholding funds, which if it were to happen would be negative for all Polish assets.Separately, the attached file is a snapshot of the EM 10y rates market in which I seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the trades in more detail. The tables include expected returns on the trades on a 3-month horizon assuming mean reversion in this period.

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the trades in more detail. The tables include expected returns on the trades on a 3-month horizon assuming mean reversion in this period.

Alpha Bites: Current Trade Recommendations in EM FX and Rates

The sell-off in US rates in the aftermath of the hawkish Fed has spilled over to other countries. Within EM rates, we identify the dislocations, which are typical during periods when volatility rises. We are able to explain away most of the dislocations except for Poland and Czechia. Indeed, we have two outstanding trade recommendations in these countries to reflect our view.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

The sell-off in US rates in the aftermath of the hawkish Fed has spilled over to other countries. Within EM rates, we identify the dislocations, which are typical during periods when volatility rises. We are able to explain away most of the dislocations except for Poland and Czechia. Indeed, we have two outstanding trade recommendations in these countries to reflect our view.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Identifying Dislocations Among EM Rates as US Rates Sell Off

Poland

A vanilla interest rate swap us an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.

PLN 5Y (PZSW5 CURNCY)

Alpha Bites: Take Profits on Receive Czech 5y Vs Pay Poland 5y Rate

I recommend closing the cross-country trade – Pay Poland 5y vs Receive Czech 5y rate. With Poland’s central bank hiking aggressively after being...

Gautam Jain, PhD, CFA

Outliers Within EM Rates Amid Rising Volatility of US Rates

The bout of volatility ins US rates has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their...

Gautam Jain, PhD, CFA

Rates in Poland Catching up With Peers

Poland's surprisingly aggressive rate hike last week was supportive of my recommendation to pay Poland 5y vs Czech 5y, which I suggest continuing...

Gautam Jain, PhD, CFA

Alpha Bites: Current Trade Recommendations in EM FX and Rates

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Identifying Dislocations Among EM Rates as US Rates Sell Off

Of the dislocations within EM rates that followed the sell-off in US rates, we can explain away most except for Poland and Czechia, where we have...

Gautam Jain, PhD, CFA