Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

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

In this week’s Alpha Bites, we recommend buying the Korean won (KRW) against the Chinese renminbi (CNY). The won has underperformed partly because of the low carry and FX interventions, with the recent missile test by North Korea and downgrading of the country’s potential growth by the central bank adding to the negative sentiment. Meanwhile, the renminbi is not reflecting the ongoing growth weakness in the country or pricing any risk premium related to the acute sell-off in Chinese equities. With the two currencies trading at extremes, we recommend the KRW against CNY cross in a beta-neutral ratio.

In this week’s Alpha Bites, we recommend buying the Korean won (KRW) against the Chinese renminbi (CNY). The won has underperformed partly because of the low carry and FX interventions, with the recent missile test by North Korea and downgrading of the country’s potential growth by the central bank adding to the negative sentiment. Meanwhile, the renminbi is not reflecting the ongoing growth weakness in the country or pricing any risk premium related to the acute sell-off in Chinese equities. With the two currencies trading at extremes, we recommend the KRW against CNY cross in a beta-neutral ratio.

Alpha Bites: Long Korean Won Vs Short Chinese Renminbi

With the US dollar and EM currencies on aggregate trading in a range for much of the year, their volatilities have dropped to the lowest level since the start of the pandemic. Since a drop in volatility engenders a carry-trade environment, we test this hypothesis on EM currencies and conclude that indeed currencies with high risk-adjusted carry have been outperforming, and vice versa. A currency that we continue to like from the perspective of improving carry is the Chilean peso.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 and EM currencies on aggregate trading in a range for much of the year, their volatilities have dropped to the lowest level since the start of the pandemic. Since a drop in volatility engenders a carry-trade environment, we test this hypothesis on EM currencies and conclude that indeed currencies with high risk-adjusted carry have been outperforming, and vice versa. A currency that we continue to like from the perspective of improving carry is the Chilean peso.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: Are EM Currencies in a Carry-Trade Environment?

Cross-Asset Liquidity Strategist, CrossBorder Capital

Michael J. Howell

Cross-Asset Liquidity Strategist

Implementing Research Using Alt Data & AI

CrossBorder Capital

CrossBorder Capital is a London-based independent investment advisory firm. Founded in 1996, it exploits a gap in the investment arena by focusing on Central bank liquidity. 

It specialises in the monitoring and analysis of global liquidity flows - an important determinant of asset prices, from currencies through to bonds, equities and real estate.

CrossBorder Capital implements its investment strategy and currently manages over US$ 350m.


Cross Asset Strategy

<ul>
<li>Chinese economy is mysteriously weak in 2021. Yet policy stimulus is so far muted
</li>
<li>China may be refocusing economy policy permanently away from ‘growth’ and towards ‘stability’
</li>
<li>This could mark a major ‘financialization’ drive linked to the growing international use of the Yuan</li>
<li>China’s domestic growth rate could potentially halve compared to the past decade</li>
<li>World GDP growth trend may be dented by around ½% per annum as result</li>
</ul>


Chinese economy is mysteriously weak in 2021. Yet policy stimulus is so far muted

China may be refocusing economy policy permanently away from ‘growth’ and towards ‘stability’

This could mark a major ‘financialization’ drive linked to the growing international use of the Yuan
China’s domestic growth rate could potentially halve compared to the past decade
World GDP growth trend may be dented by around ½% per annum as result


What China’s Economic Slowdown Really Means?

China

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

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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

Alpha Bites: Long Korean Won Vs Short Chinese Renminbi

We recommend a beta-neutral Long Korean won/Short Chinese renminbi trade on the back of poor performance of the won while renminbi is not...

Gautam Jain, PhD, CFA

FX Dashboard: Are EM Currencies in a Carry-Trade Environment?

As the volatilities of the US dollar and EM currencies have dropped, we test the hypothesis and conclude that EM FX is in a carry-trade...

Gautam Jain, PhD, CFA

What China’s Economic Slowdown Really Means?

The lack of policy response to China's marked economic slowdown in 2021 suggests a strategic shift towards 'stability' and away from 'growth',...

Michael J. Howell

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52-week Range

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