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

FX & Rates

218 Views, 11 May 2022 01:31

EXECUTIVE SUMMARY

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.

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