Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

FX & Rates

Two trends that are becoming clearer in these markets is the rise in yields and the rise in energy prices.Together they spell out a ‘reflationary’ stance which is inter-related to the market preparing for Fed tapering asset purchases. This is further supported by the recent move higher in US breakevens which are now set to trend up. While these may appear to be positive developments and signs of markets moving in the right direction, they do not come without risks.

Two trends that are becoming clearer in these markets is the rise in yields and the rise in energy prices.Together they spell out a ‘reflationary’ stance which is inter-related to the market preparing for Fed tapering asset purchases. This is further supported by the recent move higher in US breakevens which are now set to trend up. While these may appear to be positive developments and signs of markets moving in the right direction, they do not come without risks.

Cross Asset Strategy

As earlier notes outlined, US yields are on the rise again, potentially in a similar fashion to 2013 before the Fed announced its tapering of asset purchases. Back then we had what was called a “taper tantrum” where many EM currencies suffered. One of the worst hit was India. Rising yields in the US would invariably create some concern for positions in EM currencies as risk-reward parameters are re-drawn. In India’s case the picture is somewhat different to 2013 but still mixed as we look at it today. We have three areas to focus:<ul>
<li>
The Good: Foreign Exchange reserves and currency stability – Reserves today are more than twice what they were in 2013
</li>
<li>
The Bad: A stretched stock market that is in danger of seeing a short term pullback
</li>
<li>
The Ugly: The major rise taking place in energy prices. Not only is Oil about to surpass the 2018 high in Rupee terms but we must also notice the sharp rise in coal prices (and natural gas) which is going to cause a difficult period ahead for many people and dent India’s recovery path, even if only temporarily.
</li>
</ul>The judgement call here is that this is not going to be a repeat of 2013 for India. The short term is concerning while the longer-term outlook may not be as bad. Watch for a pullback in in the Nifty, probably by 1,000 points, and a further slip in INR and then for signs of stabilisation and possible opportunities to re-engage.

As earlier notes outlined, US yields are on the rise again, potentially in a similar fashion to 2013 before the Fed announced its tapering of asset purchases. Back then we had what was called a “taper tantrum” where many EM currencies suffered. One of the worst hit was India. Rising yields in the US would invariably create some concern for positions in EM currencies as risk-reward parameters are re-drawn. In India’s case the picture is somewhat different to 2013 but still mixed as we look at it today. We have three areas to focus:

The Good: Foreign Exchange reserves and currency stability – Reserves today are more than twice what they were in 2013


The Bad: A stretched stock market that is in danger of seeing a short term pullback


The Ugly: The major rise taking place in energy prices. Not only is Oil about to surpass the 2018 high in Rupee terms but we must also notice the sharp rise in coal prices (and natural gas) which is going to cause a difficult period ahead for many people and dent India’s recovery path, even if only temporarily.

The judgement call here is that this is not going to be a repeat of 2013 for India. The short term is concerning while the longer-term outlook may not be as bad. Watch for a pullback in in the Nifty, probably by 1,000 points, and a further slip in INR and then for signs of stabilisation and possible opportunities to re-engage.

Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

In our monthly recap note, we provide a performance update for our weekly trade recommendations in currencies and rates. We also discuss the new recommendations as well as those that we closed over the past month. We have made a total of 23 trade recommendations so far, of which 17 are in the money.

In our monthly recap note, we provide a performance update for our weekly trade recommendations in currencies and rates. We also discuss the new recommendations as well as those that we closed over the past month. We have made a total of 23 trade recommendations so far, of which 17 are in the money.

Alpha Bites: Performance Summary of Trade Recommendations – September 2021

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?

Founder

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.

In the past couple of months governments in Asia-Pacific have materially accelerated the administration of Covid-19 vaccines.But because of low starting points, vaccination rates remain low compared to the EU, US and UK and even a number EM economies (including Turkey). The exceptions are Korea, Malaysia and Japan which have now administered a similar number of doses per capita as the US, while Singapore has pulled further ahead. In countries where governments started to vaccinate early such as the US and in particular the UK, vaccine roll-outs have slowed materially in the past nine weeks. These countries are taking additional measures to encourage those not yet vaccinated to do so and there is talk of jabs for under-18s and of booster jabs at least for the most vulnerable.The picture for the increase in Covid-19 deaths since early July is even more granular. In countries where governments started vaccinating early and now have high rates of vaccination, including the UK, US and EU, the number of deaths has perhaps unsurprisingly increased only marginally. The rate of increase and total number of deaths remain negligible in New Zealand despite a sill modest vaccination roll-out. It has to varying degrees been a similar situation in Australia, Korea, Japan, Singapore and Taiwan.The increase in deaths has also been modest in India and Philippines, albeit from a higher starting point. The increase in deaths has been far higher in Indonesia, Malaysia and in particular Thailand.  Vaccination rates are a critical variable from a health and economic perspective but their direct impact on currencies has been mixed.New Zealand Dollar has outperformed but is not particularly expensive in our view. Going forward we would expect it to remain well supported even if still vulnerable to pull-backs.

In the past couple of months governments in Asia-Pacific have materially accelerated the administration of Covid-19 vaccines.But because of low starting points, vaccination rates remain low compared to the EU, US and UK and even a number EM economies (including Turkey). The exceptions are Korea, Malaysia and Japan which have now administered a similar number of doses per capita as the US, while Singapore has pulled further ahead. In countries where governments started to vaccinate early such as the US and in particular the UK, vaccine roll-outs have slowed materially in the past nine weeks. These countries are taking additional measures to encourage those not yet vaccinated to do so and there is talk of jabs for under-18s and of booster jabs at least for the most vulnerable.The picture for the increase in Covid-19 deaths since early July is even more granular. In countries where governments started vaccinating early and now have high rates of vaccination, including the UK, US and EU, the number of deaths has perhaps unsurprisingly increased only marginally. The rate of increase and total number of deaths remain negligible in New Zealand despite a sill modest vaccination roll-out. It has to varying degrees been a similar situation in Australia, Korea, Japan, Singapore and Taiwan.The increase in deaths has also been modest in India and Philippines, albeit from a higher starting point. The increase in deaths has been far higher in Indonesia, Malaysia and in particular Thailand.  Vaccination rates are a critical variable from a health and economic perspective but their direct impact on currencies has been mixed.New Zealand Dollar has outperformed but is not particularly expensive in our view. Going forward we would expect it to remain well supported even if still vulnerable to pull-backs.

India

The Indian rupee is the official currency of India. 

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Bonds & FX: Navigating Another Taper

As US yield rise with higher energy prices, we attempt to provide clarification in FX markets where some emerging markets are at risk of suffering...

Shyam Devani

India: The Good, The Bad, and the Ugly

India shows three distinct yet inter-related markets: FX Reserves, the Stock market, and Energy. Together they seem to present short term risks as...

Shyam Devani

Alpha Bites: Performance Summary of Trade Recommendations – September 2021

We provide a performance update of all our trade recommendations along with discussing the new trades from last month. We have made a total of 23...

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

Vaccination and Currency Immunity

Vaccination rates matter but for some Asia-Pacific countries, economies and currencies they are not proving to be a panacea.

Olivier Desbarres

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