Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

As the US dollar has come off the peak, EM currencies have benefited, including Asian currencies. The Thai baht is among the currencies that have performed well lately as it has been supported by easing of curbs on falling coronavirus cases, signs of tourism picking up, raising of the debt ceiling to create space for further fiscal stimulus, and the central bank turning less dovish. While there is ample room for the baht to make up its lag with the rest of EM, the currency's recovery is likely to be gradual and marked by volatility.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.

As the US dollar has come off the peak, EM currencies have benefited, including Asian currencies. The Thai baht is among the currencies that have performed well lately as it has been supported by easing of curbs on falling coronavirus cases, signs of tourism picking up, raising of the debt ceiling to create space for further fiscal stimulus, and the central bank turning less dovish. While there is ample room for the baht to make up its lag with the rest of EM, the currency's recovery is likely to be gradual and marked by volatility.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: Is the Thai Baht Finally Turning?

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?

With the dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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 dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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: Winners and Losers in EM FX Amidst Dollar Strengthening

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

Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Another break has taken place in US Fixed Income markets - US 5-year yield is making higher highs for the yearThis break through 98 bps looks meaningful, especially if it sustains into month end or week endThe path seems to be set for a move to at least 1.30% and then as high as the 1.80% area probably in Q1 2022.While 2-year yield is also rising, it is unlikely to continue at the same pace. Instead, we would expect to see a steeper curve and a break through the year’s high of 80bps on the US 2s5sOverall, the picture is looking increasingly like that seen before the Fed tapering of 2013.

Another break has taken place in US Fixed Income markets - US 5-year yield is making higher highs for the yearThis break through 98 bps looks meaningful, especially if it sustains into month end or week endThe path seems to be set for a move to at least 1.30% and then as high as the 1.80% area probably in Q1 2022.While 2-year yield is also rising, it is unlikely to continue at the same pace. Instead, we would expect to see a steeper curve and a break through the year’s high of 80bps on the US 2s5sOverall, the picture is looking increasingly like that seen before the Fed tapering of 2013.

United States

The U.S. Dollar Index(USDX) indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. FOR REAL TIME SEE EIS ICEA<GO>.

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FX Dashboard: Is the Thai Baht Finally Turning?

The Thai baht has performed well lately on the easing of curbs and tourism picking up. While there is ample room to make up its previous lag, the...

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: Winners and Losers in EM FX Amidst Dollar Strengthening

In the latest bout of dollar strengthening, we go over the outperformers and underperformers among EM currencies to identify potential trading...

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

US Yields: The Taper Trailer

US 5 year yield is making new highs for the year and the picture now looks very similar to that seen during what was known as the 'taper tantrum'...

Shyam Devani

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