Founder

Olivier Desbarres

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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.

FX & Rates

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the<a href="https://www.bis.org/statistics/eer.htm" target="_blank" rel="noopener"> BIS</a> (April 2019) and national central banks (see <a href="https://gallery.mailchimp.com/948838a86ce72ab6d8019a39d/files/15f4d8a9-56a4-46fd-9d78-607e5fd523e6/4X_Global_Research_Nominal_Effective_Exchange_Rates_Monthly_seasonal_patterns.pdf" target="_blank" rel="noopener">Nominal Effective Exchange Rates: Monthly seasonal patterns</a>, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

This report updates the monthly seasonal patterns of 31 major Nominal Effective Exchange Rates(NEERs) going back to January 2010, using over two million daily data points with trade-weights derived from the BIS (April 2019) and national central banks (see Nominal Effective Exchange Rates: Monthly seasonal patterns, 10 January 2019). A number of factors can drive currency seasonality, including underlying seasonal patterns in balance of payment flows, the timing of public holidays and market liquidity. However, significant changes in central bank or government policy, major domestic events (e.g. Brexit) and once-in-a-lifetime “black swan” events such as the Covid-19 pandemic January can break down even well established seasonal currency patterns. In emerging Asia interventionist central banks have in part eroded monthly currency seasonality.Unsurprisingly, typical monthly seasonal currency patterns broke down in 2020, with a few exceptions. In particular, when global risk sentiment collapsed in March and peaked in June only a handful of currencies moved broadly in line with their historical patterns. Historical seasonal patterns somewhat re-established themselves in Q3 (notably August) with domestic factors once again driving asset prices, including currencies. But the resurgence in Covid-19 cases and deaths in Q4 along with the re-imposition of national lockdowns once again contributed to a breakdown in historical seasonal patterns, albeit not as marked as in March or June.The Brazilian Real and Colombian Peso NEERs recorded the strongest average rates of appreciation in the month of January in 2010-2019, while the Turkish Lira and Russian Rouble were the weakest. About 15 NEERs traded broadly in line with their historical patterns in January 2020.However, the Covid-19 pandemic was still in its infancy and its impact on global economies and financial markets still modest. The risk is that many currencies, including the typically strong Swiss Franc, may in January 2021 continue to deviate materially from their 2010-2019 seasonal patterns in our view.

Monthly Currency Seasonality: Down and Out?

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Media coverage of Emerging Market currencies tends to oscillate between the very bearish and very bullish, with little differentiation between low and high-yielding currencies or between regional blocks let alone between the dozens of currencies still referred to, rightly or wrongly, as “emerging”. Price action in 2019 only partially vindicates this approach.News articles about the November EM currency rally and the long list of factors supporting further outperformance next year have been rife.EM currencies, particularly high-yielders, materially outperformed in the fortnight following the US elections thanks in part to a pick-up in portfolio inflows. The prevailing view was/is that a less conflictual Biden presidency will be a net positive for global trade and commodity prices. EM currencies appreciated further following news on 23rd November that the more affordable Astra Zeneca vaccine was up to 90% effective and Trump’s announcement that he would allow the transition of power to President-elect Biden.However, in the past two weeks a GDP-weighted basket of EM currencies (excluding the Chinese Renminbi) has appreciated only 0.9% versus the Dollar and underperformed a basket of developed market currencies (+1.3%). Moreover, high yielding EM currencies (+1.1%) have only marginally outperformed low-yielding EM currencies (+0.7%). Domestic and regional factors over-and-above “global risk appetite” have arguably contributed to the outperformance of Central European and Latam currencies and the more mixed (read subdued) performance of high-yielding EM and Asian currencies. One explanation is that some of these EM currencies are already pricing in a lot of “good” news.The consensus forecast is seemingly that EM currencies will outperform both the Dollar and developed market currencies going forward. The long list of supporting factors includes i) cheap EM valuations, ii) EM currencies’ yield advantage, iii) the benefits to EM of further Dollar depreciation and iv) a rebound in global economic growth. We sympathise with this view, albeit with some important caveats. One is that more interventionist Asian central banks may stop their currencies from fully joining any EM currency party in 2021. Moreover, we would split the next 13 months into three timelines.

Emerging Market Currencies: Hopes and Realities

Market volatility has been reasonably subdued in recent weeks, despite acute event (and macro data) risk in the next four weeks, including of course US presidential elections on 3rd November, and a number of significant macro, policy and geopolitical developments.In the past month volatility in major developed and emerging market currencies versus the US Dollar has only risen materially in the high-yielding Turkish Lira and Mexican Peso and the low-yielding Polish Zloty, Korean Won and more surprisingly the Taiwan Dollar.However, this is not a case of more confident financial market participants finding their feet, in our view, but rather a reflexion of financial markets unable to see through the smoke and reluctant to pit themselves against their peers going into year-end and/or test monetary authorities’ resolve at time of acute uncertainty. S&amp;P 500 (realized) volatility has edged lower since its early September spike, with markets seemingly undecided whether a Trump or Biden victory will be a net positive for equities.For similar reasons the Dollar, Euro, Sterling, Yen and Swiss Franc have shown little directionality since late-July. Headwinds and tailwinds for these reserve currencies have either tended to cancel each other or simply fade, leaving market participants in two-minds and opting for the path of least regret. Back in November 2019 we correctly predicted that “global FX volatility would rise in coming weeks, with the potential for a volatility spike in mid-December”. We once again think the risk is biased towards FX volatility rising in coming weeks, particularly given the still very uncertain outcome of US elections to be held in just 26 days.We think the risk of higher volatility is most acute if US President Trump once again defies opinion polls to win or if a prolonged period of uncertainty ensues in the event of either candidate contesting the result of a very close election.Moreover, the odds Sterling volatility spiking higher in the next fortnight are high, in our view, whatever the outcome of UK-EU negotiations over a new trade deal which will likely reach a crescendo ahead of the European Council meeting on 15-16 October.

Market volatility has been reasonably subdued in recent weeks, despite acute event (and macro data) risk in the next four weeks, including of course US presidential elections on 3rd November, and a number of significant macro, policy and geopolitical developments.In the past month volatility in major developed and emerging market currencies versus the US Dollar has only risen materially in the high-yielding Turkish Lira and Mexican Peso and the low-yielding Polish Zloty, Korean Won and more surprisingly the Taiwan Dollar.However, this is not a case of more confident financial market participants finding their feet, in our view, but rather a reflexion of financial markets unable to see through the smoke and reluctant to pit themselves against their peers going into year-end and/or test monetary authorities’ resolve at time of acute uncertainty. S&amp;P 500 (realized) volatility has edged lower since its early September spike, with markets seemingly undecided whether a Trump or Biden victory will be a net positive for equities.For similar reasons the Dollar, Euro, Sterling, Yen and Swiss Franc have shown little directionality since late-July. Headwinds and tailwinds for these reserve currencies have either tended to cancel each other or simply fade, leaving market participants in two-minds and opting for the path of least regret. Back in November 2019 we correctly predicted that “global FX volatility would rise in coming weeks, with the potential for a volatility spike in mid-December”. We once again think the risk is biased towards FX volatility rising in coming weeks, particularly given the still very uncertain outcome of US elections to be held in just 26 days.We think the risk of higher volatility is most acute if US President Trump once again defies opinion polls to win or if a prolonged period of uncertainty ensues in the event of either candidate contesting the result of a very close election.Moreover, the odds Sterling volatility spiking higher in the next fortnight are high, in our view, whatever the outcome of UK-EU negotiations over a new trade deal which will likely reach a crescendo ahead of the European Council meeting on 15-16 October.

Event Risk and Market Volatility: Partners in Crime

Major currencies, equity markets and the price of crude oil since 8th June – the cycle low in the US Dollar – have exhibited reasonably limited directionality, narrow trading ranges and very low volatility, with the notable exception of currencies in Central and Latin America.However this is not a case of more confident financial market participants finding their feet, in our view. Rather it is a reflexion of greater global risk aversion, with financial markets unable to see through the smoke and reluctant to pit themselves against their peers and test monetary authorities’ resolve at a time of still acute uncertainty on many levels.

Major currencies, equity markets and the price of crude oil since 8th June – the cycle low in the US Dollar – have exhibited reasonably limited directionality, narrow trading ranges and very low volatility, with the notable exception of currencies in Central and Latin America.However this is not a case of more confident financial market participants finding their feet, in our view. Rather it is a reflexion of greater global risk aversion, with financial markets unable to see through the smoke and reluctant to pit themselves against their peers and test monetary authorities’ resolve at a time of still acute uncertainty on many levels.

Risk Aversion, Not Panic, in Face of Uncertainty

Developed central banks in the past week have been falling over themselves to loosen monetary policy and secure the proper functioning of financial and credit markets. The Fed, RBNZ, Bank of Canada, Bank of England and Norges Bank have delivered inter-meeting policy rate cuts of between 50bp and 100bp and our measure of the developed central bank policy rate has been cut 74bp so far in March, the largest monthly cut since December 2008. It is now in negative territory (-0.05%) for the first time in at least 15 years. This has raised concerns that developed central banks are close to running out of ammunition, at least in terms of policy rate cuts, which have arguably weighed on global equities and contributed to the outperformance of the Dollar, Euro, Swiss Franc and Yen.In contrast, major Emerging Market (EM) central banks have, with the exception of Bank of Korea and Banco Central de Chile, kept their policy rates unchanged in the past fortnight. This is broadly in line with our view that “<a href="https://mcusercontent.com/948838a86ce72ab6d8019a39d/files/bcf6e1e5-b847-4ca9-a030-bcaf969137b1/4X_Global_Research_Asian_central_bank_policy_rates_scalpel_not_knife.pdf" target="_blank" rel="noopener">the overall pace and magnitude of [central bank] policy rate cuts in Non-Japan Asia will be modest</a>.” The EM central bank policy rate – a GDP-weighted average of policy rates in 20 major EM economies – was admittedly cut a sizeable 74bp between mid-2019 and end-January 2020 but has been cut only 4bp so far in March, albeit to a new multi-decade low of about 4.3%.We think EM central banks are concerned that further rates cuts could exacerbate capital outflows and put further downward pressure on their currencies and upward pressure on already high and/or rising headline CPI-inflation. As a simple rule of thumb we think EM central banks with a high real policy rate and stable/appreciating currencies are more likely to cut their policy rates in coming weeks (see Figure 7). On this basis central banks in India, the Philippines and Taiwan seemingly have room to cut rates.We also think that the South African Reserve Bank will cut rates at its policy meeting on 19th March, as long as the Rand remains broadly stable as it has been in the past week.

Developed central banks in the past week have been falling over themselves to loosen monetary policy and secure the proper functioning of financial and credit markets. The Fed, RBNZ, Bank of Canada, Bank of England and Norges Bank have delivered inter-meeting policy rate cuts of between 50bp and 100bp and our measure of the developed central bank policy rate has been cut 74bp so far in March, the largest monthly cut since December 2008. It is now in negative territory (-0.05%) for the first time in at least 15 years. This has raised concerns that developed central banks are close to running out of ammunition, at least in terms of policy rate cuts, which have arguably weighed on global equities and contributed to the outperformance of the Dollar, Euro, Swiss Franc and Yen.In contrast, major Emerging Market (EM) central banks have, with the exception of Bank of Korea and Banco Central de Chile, kept their policy rates unchanged in the past fortnight. This is broadly in line with our view that “the overall pace and magnitude of [central bank] policy rate cuts in Non-Japan Asia will be modest.” The EM central bank policy rate – a GDP-weighted average of policy rates in 20 major EM economies – was admittedly cut a sizeable 74bp between mid-2019 and end-January 2020 but has been cut only 4bp so far in March, albeit to a new multi-decade low of about 4.3%.We think EM central banks are concerned that further rates cuts could exacerbate capital outflows and put further downward pressure on their currencies and upward pressure on already high and/or rising headline CPI-inflation. As a simple rule of thumb we think EM central banks with a high real policy rate and stable/appreciating currencies are more likely to cut their policy rates in coming weeks (see Figure 7). On this basis central banks in India, the Philippines and Taiwan seemingly have room to cut rates.We also think that the South African Reserve Bank will cut rates at its policy meeting on 19th March, as long as the Rand remains broadly stable as it has been in the past week.

Emerging Market Central Banks Playing Catch-Up

Poland

The Polish Zloty dollar is the official currency of Poland

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PLN (USDPLN CURNCY)

Monthly Currency Seasonality: Down and Out?

Covid-19 pandemic and national lockdowns in 2020 wreaked havoc with historical monthly seasonal patterns for developed and EM currencies. But what...

Olivier Desbarres

Emerging Market Currencies: Hopes and Realities

EM currencies appreciated vs USD and outperformed in fortnight following US elections but since then performance more differentiated. Consensus is...

Olivier Desbarres

Event Risk and Market Volatility: Partners in Crime

Market volatility has been reasonably subdued in recent weeks, despite acute event (and macro data) risk in the next four weeks, including of...

Olivier Desbarres

Risk Aversion, Not Panic, in Face of Uncertainty

Major currencies, equity markets and the price of crude oil since 8th June – the cycle low in the US Dollar – have exhibited reasonably limited...

Olivier Desbarres

Emerging Market Central Banks Playing Catch-Up

Developed central banks in the past week have been falling over themselves to loosen monetary policy and secure the proper functioning of financial...

Olivier Desbarres

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)