Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

A month ago, I recommended hedging broad EM currency exposure with the euro. In this note, I first evaluate how well the hedge worked and then address the question of whether to continue to hold the hedge or not. I demonstrate that the hedge has been very effective based on the hedged returns and I also recommend continuing to hold on to the hedge as risks remain on the horizon.Separately, the attached file is a snapshot of the EM currency market in which I 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.

A month ago, I recommended hedging broad EM currency exposure with the euro. In this note, I first evaluate how well the hedge worked and then address the question of whether to continue to hold the hedge or not. I demonstrate that the hedge has been very effective based on the hedged returns and I also recommend continuing to hold on to the hedge as risks remain on the horizon.Separately, the attached file is a snapshot of the EM currency market in which I 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.

How Effective Has the Euro Hedge Been for EM FX?

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

The delivery of the ECB's policy stance and guidance this week raises questions about what is going on and which direction it is facing. The choice of words by the President is particularly interesting.

The delivery of the ECB's policy stance and guidance this week raises questions about what is going on and which direction it is facing. The choice of words by the President is particularly interesting. 

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

Sometimes it is not what the market does but rather what the market does not do that can be more telling.The USD is down almost across the board following concerning sentiment data from the US which also took yields lower. BUT…Why is USDCNH unchanged?It brings us back to the conversation of ‘currency wars’The Renminbi basket has been trading near its multi year highs for several weeks. It is perhaps why the Chinese changed their RRR policy a few weeks ago. Recent data reflects a more relaxed recovery in China as it is worse than expected – see retail sales and industrial production as latest examples. The Covid situation in China is far from over as news, including partial closure of ports, clearly shows. In basic terms China is uncomfortable with its current situation and needs support. Given the rise of the Renminbi in broad terms over the past year, it appears now might be the time for that support to come in the form of a weaker currency.It is with this in mind that we must pay further attention to EURCNH which is turning from the covid panic lows of 2020. What business does it have trading around 7.60? The price action developments suggest we move higher. The technicals on the chart suggest the same. The logical path following the height of the Renminbi basket also points to the same, especially if this is the start of a decent enough short term move down on the USD.This possible tactical ‘rotation’ or ‘USD diversification’ on part of China (if indeed that is what we are seeing) could add further support to EURUSD, which once again has held on to good levels at 1.17.

EM FX volatility has dropped to its lowest level since the start of pandemic, which is likely leading to a positive scenario for currencies. In this note, we highlight the currencies most likely to benefit in such an environment.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.

EM FX volatility has dropped to its lowest level since the start of pandemic, which is likely leading to a positive scenario for currencies. In this note, we highlight the currencies most likely to benefit in such an environment.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: Declining EM FX Volatility Foreshadows a Positive Environment

Germany

The euro is the official currency of the European Economic & Monetary Union. 

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Euro (USDEUR CURNCY)

How Effective Has the Euro Hedge Been for EM FX?

In this note, I first evaluate how well has the euro hedge for EM FX that I recommended a month ago worked and then address the question of whether...

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

Europe & The ECB - The Lady

Does the choice of language by the ECB President reveal what might be happening beneath the surface? Ultimately actions speak louder than words.

Shyam Devani

What About the Renminbi?

Latest developments across FX markets lead us to ask questions about recent Renminbi strength and if that is about to change. Watch EURCNH

Shyam Devani

FX Dashboard: Declining EM FX Volatility Foreshadows a Positive Environment

With EM FX volatility dropping to its lowest level since the start of pandemic, we highlight the currencies most likely to benefit in the likely...

Gautam Jain, PhD, CFA

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