Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

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

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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.

Time and time again in the past five weeks US Treasuries and the S&amp;P 500 have sold off and the Dollar rallied in the wake of hawkish US surprises only for markets to quickly unwind these moves. Volatility in US financial markets has ultimately remained subdued and directionality has been limited. In the month to 3rd June US Treasury yields rose only very marginally and the S&amp;P 500 was broadly unchanged. Notably the Dollar NEER weakened a further 1%, suggesting that markets’ appetite to short the Dollar was not significantly curtailed by these bouts of inflation-concerns.Moreover, quasi-dormant US financial markets have since come to life (or at least a semblance of life), with the 10-year Treasury yield down 13bp to a 3-month low of 1.49% and the until-recently stagnant S&amp;P 500 up 0.8% to a new record-high of 4,227 on 8th June.The erosion of the Dollar’s long-term real yield and rally in riskier assets have resulted in the “safe-haven” Dollar NEER depreciating a further 0.8% to its weakest level since late-April 2018. The Dollar NEER has now weakened over 2% since 19th April, to a 37-month low, in line with our bearish Dollar outlook. Our take is that markets’ belief that the current spike in year-on-year US inflation above the Federal Reserve’s medium-term target will be permanent has further eroded. As we argued a fortnight ago, markets are rightly in our view not (yet) buying into the notion that the Federal Reserve is “behind the curve” and will have no choice but to announce in the near-term a tightening of US monetary policy.The bottom line is that “wait-and-see” is still seemingly the default setting for most developed central banks, including the Federal Reserve and European Central Bank.Some analysts have argued that the release tomorrow of US CPI-inflation data for May, even if in line with consensus forecasts, could prove to be the straw that finally breaks the markets’ dovish back. Based on precedent we do not think this will the case.

Time and time again in the past five weeks US Treasuries and the S&amp;P 500 have sold off and the Dollar rallied in the wake of hawkish US surprises only for markets to quickly unwind these moves. Volatility in US financial markets has ultimately remained subdued and directionality has been limited. In the month to 3rd June US Treasury yields rose only very marginally and the S&amp;P 500 was broadly unchanged. Notably the Dollar NEER weakened a further 1%, suggesting that markets’ appetite to short the Dollar was not significantly curtailed by these bouts of inflation-concerns.Moreover, quasi-dormant US financial markets have since come to life (or at least a semblance of life), with the 10-year Treasury yield down 13bp to a 3-month low of 1.49% and the until-recently stagnant S&amp;P 500 up 0.8% to a new record-high of 4,227 on 8th June.The erosion of the Dollar’s long-term real yield and rally in riskier assets have resulted in the “safe-haven” Dollar NEER depreciating a further 0.8% to its weakest level since late-April 2018. The Dollar NEER has now weakened over 2% since 19th April, to a 37-month low, in line with our bearish Dollar outlook. Our take is that markets’ belief that the current spike in year-on-year US inflation above the Federal Reserve’s medium-term target will be permanent has further eroded. As we argued a fortnight ago, markets are rightly in our view not (yet) buying into the notion that the Federal Reserve is “behind the curve” and will have no choice but to announce in the near-term a tightening of US monetary policy.The bottom line is that “wait-and-see” is still seemingly the default setting for most developed central banks, including the Federal Reserve and European Central Bank.Some analysts have argued that the release tomorrow of US CPI-inflation data for May, even if in line with consensus forecasts, could prove to be the straw that finally breaks the markets’ dovish back. Based on precedent we do not think this will the case. 

Germany

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

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Euro (USDEUR CURNCY)

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Have Hawks Finally Lost Altitude?

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