Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

As the US dollar has strengthened this month, it has weighed on EM currencies. Several Asian currencies, in particular, have been among the worst performers, adjusted for their respective betas. Among them, Korean won has underperformed on a combination of low carry and FX interventions. The carry should rise as the central bank has started its tightening cycle, but it is likely to be gradual. Moreover, the recent missile test by North Korea and the lowering of the country's potential growth by the central bank have weighed on the currency. Our view is that the currency is now reflecting these risks and should gradually close its gap with the rest of EM.

As the US dollar has strengthened this month, it has weighed on EM currencies. Several Asian currencies, in particular, have been among the worst performers, adjusted for their respective betas. Among them, Korean won has underperformed on a combination of low carry and FX interventions. The carry should rise as the central bank has started its tightening cycle, but it is likely to be gradual. Moreover, the recent missile test by North Korea and the lowering of the country's potential growth by the central bank have weighed on the currency. Our view is that the currency is now reflecting these risks and should gradually close its gap with the rest of EM.

FX Dashboard: Is Korean Won’s Underperformance Overdone?

We revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.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.

We revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.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 Monetary Policy Still Driving FX Returns?

After being one of the best performing EM currencies this year, the tide has turned for the South African rand in our view. We expect headwinds from the growth outlook worsening as a result of the July riots and a slow vaccination pace. With the central bank likely to stay on hold through 2021, the currency's carry should drop a well. Moreover, the tailwind from commodities may also be behind.

After being one of the best performing EM currencies this year, the tide has turned for the South African rand in our view. We expect headwinds from the growth outlook worsening as a result of the July riots and a slow vaccination pace. With the central bank likely to stay on hold through 2021, the currency's carry should drop a well. Moreover, the tailwind from commodities may also be behind.

FX Dashboard: South African Rand’s Recent Underperformance to Continue

We reiterate our view of the US dollar staying in a range despite the brief breach last week. We expand our baseline view to incorporate two risk scenarios, equivalent to the two ends of the dollar smile. From the point of view of EM currencies, the best-case scenario is our baseline view of the dollar staying rangebound. We also expound on the recent increase in the correlation between commodities and EM currencies and what it means for EM FX.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.

We reiterate our view of the US dollar staying in a range despite the brief breach last week. We expand our baseline view to incorporate two risk scenarios, equivalent to the two ends of the dollar smile. From the point of view of EM currencies, the best-case scenario is our baseline view of the dollar staying rangebound. We also expound on the recent increase in the correlation between commodities and EM currencies and what it means for EM FX.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: US Dollar, Commodities, and EM Currencies

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Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “<a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210616.pdf" target="_blank" rel="noopener">dot-chart</a>”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view.

Global FX volatility – as measured by the 5-day Standard Deviation (SD) in the daily percentage change in the spot (closing) price of a turnover-weighted basket of 32 major currency pairs against the US Dollar – remains depressed by historical standards.While global FX volatility rose slightly on 11th August to about 0.32 SD following the release of US CPI-inflation data, it is still well below its level one month ago (0.43 SD) and 10-year average (0.47 SD). Notably global FX volatility is at a similar level (0.30 SD) as it was in the run-up to the 16th June Fed meeting and release of a more hawkish FOMC “dot-chart”.Volatility versus the US Dollar in most of these 32 developed and EM currencies has either fallen in the past month from already modest levels or been broadly stable. Volatility in the high-yielding Brazilian Real and low-yielding Canadian Dollar, Czech Crown, Norwegian Krone and Hungarian Forint has fallen the most in absolute terms. However, there have been a few notable exceptions, including the Turkish Lira, Thai Baht and Chilean, Colombian and Philippines Pesos.USD/THB volatility has risen further in past month and is now near top end of its admittedly narrow 12-month range. The Baht has been choppy against a strong US Dollar, resulting in the Baht NEER appreciating 1.4% since the multi-year low recorded on 6th August.GBP/EUR volatility is currently at its lowest level since early June. Sterling’s appreciation against the Euro has been slow and steady, in line with our expectations. Volatility in global FX (and the S&amp;P 500) also remains very modest compared to volatility in other asset classes, notably US Treasuries and Brent crude oil (see Figure 5). Most of the price action has been in the US rates market in recent months, perhaps unsurprisingly given protracted debate about the timeline for Fed tapering and rate hikes.There are a number of factors behind this low transmission from US rates to Dollar crosses and equities but, as was the case in late-2019, FX markets are ultimately pricing in very little risk of policy, macro data or geopolitical surprises, in our view. 

Low Global FX Vol: Maturity or Complacency?

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The Brazilian real is the official currency of the Federative Republic of Brazil.  

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FX Dashboard: Is Korean Won’s Underperformance Overdone?

The Korean won has underperformed on a combination of low carry, FX interventions, and more recently, North Korea's missile test, which should all...

Gautam Jain, PhD, CFA

FX Dashboard: Is Monetary Policy Still Driving FX Returns?

We modify our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies to say...

Gautam Jain, PhD, CFA

FX Dashboard: South African Rand’s Recent Underperformance to Continue

We expect the South African rand to lag with the growth outlook worsening due to the July riots and a slow vaccination pace, the central bank...

Gautam Jain, PhD, CFA

FX Dashboard: US Dollar, Commodities, and EM Currencies

We discuss our base-case view for the US dollar along with the risk scenarios and their implications for EM currencies. We also discuss the...

Gautam Jain, PhD, CFA

Low Global FX Vol: Maturity or Complacency?

Global FX vol is low by historical standards and relative to vol in US Treasuries, and for good resason. But FX markets are pricing in very little...

Olivier Desbarres

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