Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Given the strong performance of several Latin American currencies in recent days, it is fair to ask if these returns are being driven purely by their high carry.</li>
<li>To address this question, we compare the performance of each currency, adjusted by its beta, with its carry, adjusted for its volatility.</li>
<li>While there is some overlap between performance and carry, we find no strong correlation, leading us to conclude that we are currently not in a carry-trade environment.</li>
</ul>


Given the strong performance of several Latin American currencies in recent days, it is fair to ask if these returns are being driven purely by their high carry.
To address this question, we compare the performance of each currency, adjusted by its beta, with its carry, adjusted for its volatility.
While there is some overlap between performance and carry, we find no strong correlation, leading us to conclude that we are currently not in a carry-trade environment.


Is Carry Driving the Returns of EM Currencies?

<ul>
<li>The shekel has been the worst-performing currency in EM since late November with potential Fed hikes and hedging activity related to the sell-off in international stock markets weighing on it.</li>
<li>The shekel should resume its appreciating trend as the central bank would likely raise rates this year with inflation making a comeback and the balance of payment position remaining strong.</li>
<li>I recommend funding the shekel in British pounds to minimize exposure to the dollar, which continues to be volatile, and the BoE is further along in its rate-hiking cycle.</li>
</ul>


The shekel has been the worst-performing currency in EM since late November with potential Fed hikes and hedging activity related to the sell-off in international stock markets weighing on it.
The shekel should resume its appreciating trend as the central bank would likely raise rates this year with inflation making a comeback and the balance of payment position remaining strong.
I recommend funding the shekel in British pounds to minimize exposure to the dollar, which continues to be volatile, and the BoE is further along in its rate-hiking cycle.


Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

<ul>
<li>The US dollar has started appreciating again on the back of a safe-haven bid with risk aversion rising due to the Fed's upcoming rate-hiking cycle and the Russia-Ukraine tensions.</li>
<li>Given my expectation of rising dollar volatility, I had recommended hedging a diversified EMFX portfolio with the euro. Indeed, the euro hedge has worked well over the past three months.</li>
<li>I continue to prescribe maintaining the euro hedge. If the dollar remains volatile, I don't expect the low volatility of EM currencies – dragged lower by Asia – to persist. </li>
</ul>


The US dollar has started appreciating again on the back of a safe-haven bid with risk aversion rising due to the Fed's upcoming rate-hiking cycle and the Russia-Ukraine tensions.
Given my expectation of rising dollar volatility, I had recommended hedging a diversified EMFX portfolio with the euro. Indeed, the euro hedge has worked well over the past three months.
I continue to prescribe maintaining the euro hedge. If the dollar remains volatile, I don't expect the low volatility of EM currencies – dragged lower by Asia – to persist. 


Value of Euro as a Hedge for EM Currencies in Times Like These

<ul>
<li>The Russian ruble has been the worst-performing currency in EM over the past month leading to the question: Is the currency cheap based on the risk premium priced in it?</li>
<li>Comparing the current episode with the 2014 annexation of Crimea by Russia, we conclude that the market is pricing in a 10% probability of an invasion followed by crippling sanctions.</li>
<li>With the currency not particularly cheap and given the asymmetric risk-reward, I would opt to not have any exposure to it for the time being.</li>
</ul>


The Russian ruble has been the worst-performing currency in EM over the past month leading to the question: Is the currency cheap based on the risk premium priced in it?
Comparing the current episode with the 2014 annexation of Crimea by Russia, we conclude that the market is pricing in a 10% probability of an invasion followed by crippling sanctions.
With the currency not particularly cheap and given the asymmetric risk-reward, I would opt to not have any exposure to it for the time being.


Is the Risk Premium High Enough in the Russian Ruble?

<ul>
<li>The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.</li>
<li>In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. </li>
<li>In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.</li>
</ul>


The South African rand gave up much of its earlier outperformance towards the end of last year but still ended as one of the year's best performers.
In 2022 though I expect the currency to underperform on the back of a weak economic outlook with the ongoing pandemic adding to previous structural constraints to growth. 
In addition, the currency's carry is likely to stay low especially relative to its volatility and the commodity tailwind should fade as the year progresses.


South African Rand – Watch for Headwinds in 2022

Israel

The Israeli shekel is the official currency of the state of Israel. the US dollar is the official currency of the United states of America

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Is Carry Driving the Returns of EM Currencies?

The high carry of a few currencies appears to be one factor behind their recent strong performance, but on further examination, I conclude that we...

Gautam Jain, PhD, CFA

Alpha Bites: Long Israeli Shekel (ILS) Vs Short British Pound (GBP)

I recommend Long Israeli shekel/Short British pound as the shekel should resume appreciating with the central bank likely to raise rates this year,...

Gautam Jain, PhD, CFA

Value of Euro as a Hedge for EM Currencies in Times Like These

Given my expectation that the dollar should remain volatile in the near term, I continue to recommend maintaining a euro hedge for a diversified...

Gautam Jain, PhD, CFA

Is the Risk Premium High Enough in the Russian Ruble?

Despite the recent underperformance of the Russian ruble, the currency is not particularly cheap. Given the asymmetric risk-reward profile, I would...

Gautam Jain, PhD, CFA

South African Rand – Watch for Headwinds in 2022

In 2022, I expect the South African rand to underperform on the back of a weak economic outlook, low carry relative to its volatility, and the...

Gautam Jain, PhD, CFA

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