Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<p>In this note, we go over the currencies that have outperformed and underperformed in the recent bout of the rally for EM currencies along with the reasoning behind their performances and their outlooks.</p><p>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.</p>

In this note, we go over the currencies that have outperformed and underperformed in the recent bout of the rally for EM currencies along with the reasoning behind their performances and their outlooks.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 the EM Turnaround

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

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.

<p><strong>The Federal Reserve has in the past six weeks diligently stuck to its “patience until substantial further progress is seen” monetary policy mantra. Its “reward” has been range-bound US Treasury yields, a slowly depreciating Dollar and a metronomic rise in US equity indices, with all three financial markets exhibiting only modest volatility.</strong></p><p><strong>Since 19<sup>th</sup> April the Dollar NEER has depreciated a further 0.6% to within striking distance of a 14-week low, in line with “<em>our core scenario that the Dollar will indeed lose further ground</em>”. We remain bearish the US Dollar, a theme we will explore in greater detail in forthcoming <em>FIRMS</em> reports.</strong></p><p><strong>Fed Chairperson Powell would argue that keeping US Treasury yields in check has been a worthy achievement given the backdrop of President Biden’s ambitious fiscal stimulus plans and accelerating US economic growth and rising domestic and global inflation. </strong></p><p><strong>A GDP-weighted measure of headline CPI-inflation in 32 major economies rose to 2.1% yoy in March from 1.4% yoy in February, the largest monthly increase since December 2009. But core CPI-inflation in developed economies rose only marginally in Q1 2021, with the rate of inflation in March of 1.2% yoy below its 10-year average of 1.5% yoy.</strong></p><p><strong>While backward looking these data they may explain in part why developed central banks, with the exception of Bank of Canada, have so far felt justified in keeping their policy rates on hold and the modalities of their asset-purchase programs broadly unchanged. </strong></p><p><strong>In the past month currencies in Emerging Europe, Africa and Latin America have been main beneficiaries of still reasonably low US yields, weakening Dollar, burgeoning global growth and robust risk appetite. The timing of this EM rebound has coincided with our forecasts.</strong></p><p><strong>Non-Japan Asian currencies have lagged, which we attribute in part to portfolio outflows and NJA central banks keeping a close eye on a flat-lining Chinese Renminbi.</strong></p><p><strong>This differentiated EM currency rally will extend near-term, in our view, but high-yielding EM currencies in particular remain vulnerable to any spikes in US and other developed market government bond yields and more generally market volatility. </strong></p>

The Federal Reserve has in the past six weeks diligently stuck to its “patience until substantial further progress is seen” monetary policy mantra. Its “reward” has been range-bound US Treasury yields, a slowly depreciating Dollar and a metronomic rise in US equity indices, with all three financial markets exhibiting only modest volatility.Since 19th April the Dollar NEER has depreciated a further 0.6% to within striking distance of a 14-week low, in line with “our core scenario that the Dollar will indeed lose further ground”. We remain bearish the US Dollar, a theme we will explore in greater detail in forthcoming FIRMS reports.Fed Chairperson Powell would argue that keeping US Treasury yields in check has been a worthy achievement given the backdrop of President Biden’s ambitious fiscal stimulus plans and accelerating US economic growth and rising domestic and global inflation. A GDP-weighted measure of headline CPI-inflation in 32 major economies rose to 2.1% yoy in March from 1.4% yoy in February, the largest monthly increase since December 2009. But core CPI-inflation in developed economies rose only marginally in Q1 2021, with the rate of inflation in March of 1.2% yoy below its 10-year average of 1.5% yoy.While backward looking these data they may explain in part why developed central banks, with the exception of Bank of Canada, have so far felt justified in keeping their policy rates on hold and the modalities of their asset-purchase programs broadly unchanged. In the past month currencies in Emerging Europe, Africa and Latin America have been main beneficiaries of still reasonably low US yields, weakening Dollar, burgeoning global growth and robust risk appetite. The timing of this EM rebound has coincided with our forecasts.Non-Japan Asian currencies have lagged, which we attribute in part to portfolio outflows and NJA central banks keeping a close eye on a flat-lining Chinese Renminbi.This differentiated EM currency rally will extend near-term, in our view, but high-yielding EM currencies in particular remain vulnerable to any spikes in US and other developed market government bond yields and more generally market volatility. 

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p>For our next webinar, we're excited to host Insight Provider <a href="https://www.smartkarma.com/profiles/gautam-jain-phd-cfa" target="_blank" data-smartkarma-citation="accounts:16876" rel="noopener">Gautam Jain, PhD, CFA</a> , who will be going over the process with which he comes up with trade ideas in Emerging Markets FX and Rates. </p><div><h3>The webinar will be hosted on Wednesday, 28 April 2021, 11:00 SGT/HKT.</h3></div><div>
<div class="content-highlight"><h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=87206774217" target="_blank" rel="noopener">Register for the Webinar here</a></h2></div>
<div id="ember2586"><div><div>Gautam Jain has over 20 years of experience covering global emerging fixed income markets, both as a strategist and a portfolio manager. He has worked in buy-side and sell-side firms, including The Rohatyn Group (TRG Management), Barclays Capital, and Millennium Partners. He has helped manage emerging markets local-currency and hard-currency debt funds. The assets that he covers include currencies, interest rates, sovereign credits, and related derivatives. He specialises in portfolio construction, smart-beta index creation, and asset allocation. He holds a Ph.D. in Operations Research from Columbia University and is a CFA charter holder.</div></div></div>
<div id="ember2587"><div><div><div></div></div></div></div>
</div>

For our next webinar, we're excited to host Insight Provider Gautam Jain, PhD, CFA , who will be going over the process with which he comes up with trade ideas in Emerging Markets FX and Rates. The webinar will be hosted on Wednesday, 28 April 2021, 11:00 SGT/HKT.
Register for the Webinar here
Gautam Jain has over 20 years of experience covering global emerging fixed income markets, both as a strategist and a portfolio manager. He has worked in buy-side and sell-side firms, including The Rohatyn Group (TRG Management), Barclays Capital, and Millennium Partners. He has helped manage emerging markets local-currency and hard-currency debt funds. The assets that he covers include currencies, interest rates, sovereign credits, and related derivatives. He specialises in portfolio construction, smart-beta index creation, and asset allocation. He holds a Ph.D. in Operations Research from Columbia University and is a CFA charter holder.



Smartkarma Webinar | Alpha Bites: Trade Ideas in FX and Rates

<p><strong>We estimate that the USD-value of central bank FX reserves – adjusted for currency-valuation effects – in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand rose by about $342bn (1.5% of GDP) between end-March 2020 and end-February 2021 (see </strong><a href="https://www.smartkarma.com/insights/non-japan-asia-neers-and-fx-intervention" target="_blank" rel="noopener"><strong>Non-Japan Asia: NEERs and FX intervention</strong></a><strong>, 26<sup>th</sup> March 2021). </strong></p><p><strong>The increase, which ranged from 0.3% of GDP in China to nearly 28% of GDP in Singapore, was partly the result of central banks buying foreign currency in the FX market. At the very least NJA central banks’ FX intervention capped the pace of appreciation (CNY, KRW, IDR, THB and TWD) or contributed to (modest) NEER depreciation (INR, MYR, PHP), in our view.</strong></p><p><strong>Of course the matrix of exchange rate policy AND balance of payment flows, and their underlying drivers, is key to past and future currency performance.</strong></p><p><strong>In the past 12 months the MAS has kept the Singapore Dollar NEER within a very narrow range of about 1.2%, effectively neutralising Singapore’s significant current account surplus, to support the critical external sector and ultimately reflate the economy.</strong></p><p><strong>However, the Singapore Dollar NEER’s recent rally and jump in Singapore CPI-inflation in February arguably complicate the currency’ near-term outlook. </strong></p><p><strong>Along with consensus, we forecast that the MAS will leave the parameters – (zero) slope, width and central rate – of the Singapore Dollar NEER band unchanged at its forthcoming semi-annual policy meeting. We think the NEER could dip temporarily before rebounding.</strong></p><p><strong>The People’s Bank of China has allowed large external trade surpluses and capital account inflows into China to push the Chinese Renminbi NEER to a 270-week high.</strong></p><p><strong>But the Renminbi is showing some signs of altitude sickness. The pace of monthly appreciation has halved recently and the PBoC has fixed USD/CNY higher in 6 of the past 7 sessions. Importantly CPI-inflation remains stuck at the bottom of its five-year ranges.</strong></p><p><strong>In this context, we think the risk is biased towards the PBoC more actively negating FX inflows into China and towards modest Renminbi NEER downside near-term.</strong></p>

We estimate that the USD-value of central bank FX reserves – adjusted for currency-valuation effects – in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand rose by about $342bn (1.5% of GDP) between end-March 2020 and end-February 2021 (see Non-Japan Asia: NEERs and FX intervention, 26th March 2021). The increase, which ranged from 0.3% of GDP in China to nearly 28% of GDP in Singapore, was partly the result of central banks buying foreign currency in the FX market. At the very least NJA central banks’ FX intervention capped the pace of appreciation (CNY, KRW, IDR, THB and TWD) or contributed to (modest) NEER depreciation (INR, MYR, PHP), in our view.Of course the matrix of exchange rate policy AND balance of payment flows, and their underlying drivers, is key to past and future currency performance.In the past 12 months the MAS has kept the Singapore Dollar NEER within a very narrow range of about 1.2%, effectively neutralising Singapore’s significant current account surplus, to support the critical external sector and ultimately reflate the economy.However, the Singapore Dollar NEER’s recent rally and jump in Singapore CPI-inflation in February arguably complicate the currency’ near-term outlook. Along with consensus, we forecast that the MAS will leave the parameters – (zero) slope, width and central rate – of the Singapore Dollar NEER band unchanged at its forthcoming semi-annual policy meeting. We think the NEER could dip temporarily before rebounding.The People’s Bank of China has allowed large external trade surpluses and capital account inflows into China to push the Chinese Renminbi NEER to a 270-week high.But the Renminbi is showing some signs of altitude sickness. The pace of monthly appreciation has halved recently and the PBoC has fixed USD/CNY higher in 6 of the past 7 sessions. Importantly CPI-inflation remains stuck at the bottom of its five-year ranges.In this context, we think the risk is biased towards the PBoC more actively negating FX inflows into China and towards modest Renminbi NEER downside near-term.

Crunch Time for Singapore Dollar and Renminbi

Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Cross Asset Strategy

<p>The price of Silver has closed below the 200 day moving average for the first time since May 2020. This development draws some attention. While it is not a break in itself, any lower through $24.05 on a close basis would be meaningful bearish sign.</p><p>We also review the weekly Gold chart which continues to look concerning as we sustain below the 55 week moving average .</p><p>As Bonds remain stable and the USD looking increasingly bid across many pairs, it is perhaps no wonder that both Silver and Gold are under pressure.</p>

The price of Silver has closed below the 200 day moving average for the first time since May 2020. This development draws some attention. While it is not a break in itself, any lower through $24.05 on a close basis would be meaningful bearish sign.We also review the weekly Gold chart which continues to look concerning as we sustain below the 55 week moving average .As Bonds remain stable and the USD looking increasingly bid across many pairs, it is perhaps no wonder that both Silver and Gold are under pressure.

China

The Chinese renminbi (yuan) is the official currency of The People's Republic of China. 

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CNY (USDCNY CURNCY)

FX Dashboard: Winners and Losers in the EM Turnaround

We go over the currencies that have outperformed and underperformed in the recent bout of the rally for EM currencies along with the reasoning...

Gautam Jain, PhD, CFA

Something Has Got to Give

Treasury yields have been range-bound despite global backdrop of stronger growth and rising inflation. USD weaker, equities and (most) EM...

Olivier Desbarres

Smartkarma Webinar | Alpha Bites: Trade Ideas in FX and Rates

On 28 April, 11am SGT, join our webinar with Insight Provider Gautam Jain, who will be going over the process with which he comes up with trade...

Smartkarma Research

Crunch Time for Singapore Dollar and Renminbi

We forecast MAS will leave parameters of Singapore Dollar NEER band unchanged at its policy meeting. NEER could dip temporarily before rebounding....

Olivier Desbarres

No Silver Lining, No Golden Egg

Silver and Gold are back under pressure with Bonds stable and the USD looking bid. Any lower on Silver will amount to a bearish break

Shyam Devani

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