Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

We reiterate our view of the US dollar staying in a range despite the brief breach last week. We expand our baseline view to incorporate two risk scenarios, equivalent to the two ends of the dollar smile. From the point of view of EM currencies, the best-case scenario is our baseline view of the dollar staying rangebound. We also expound on the recent increase in the correlation between commodities and EM currencies and what it means for EM FX.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.

We reiterate our view of the US dollar staying in a range despite the brief breach last week. We expand our baseline view to incorporate two risk scenarios, equivalent to the two ends of the dollar smile. From the point of view of EM currencies, the best-case scenario is our baseline view of the dollar staying rangebound. We also expound on the recent increase in the correlation between commodities and EM currencies and what it means for EM FX.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: US Dollar, Commodities, and EM Currencies

In this week’s Alpha Bites, we recommend closing the long Indian rupee versus the short Korean won trade. One of our rationales behind the trade was that the second wave of coronavirus was likely to delay but not derail the Indian economy. Moreover, with inflation staying outside the Reserve Bank of India’s target band, we expected it to gradually start tilting hawkish. Both expectations are playing out with the economic recovery back in place and one member of the MPC voting against keeping the accommodative stance at the last meeting. The rupee, in turn, has made up some of its lag with its Asian peers, allowing us to recommend taking profits on the trade.

In this week’s Alpha Bites, we recommend closing the long Indian rupee versus the short Korean won trade. One of our rationales behind the trade was that the second wave of coronavirus was likely to delay but not derail the Indian economy. Moreover, with inflation staying outside the Reserve Bank of India’s target band, we expected it to gradually start tilting hawkish. Both expectations are playing out with the economic recovery back in place and one member of the MPC voting against keeping the accommodative stance at the last meeting. The rupee, in turn, has made up some of its lag with its Asian peers, allowing us to recommend taking profits on the trade.

Alpha Bites: Take Profits on Long Indian Rupee Vs Short Korean Won

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Technical Analysis

Korea Stock Exchange KOSPI 200 / Technical Analysis

Following up on our short rotation into Korea and Taiwan. Kospi 200 broke the 425 support in an aggressive nature after the USD/KRW broke out above 1,152.Korea short from 435-44 zone (437 entry) saw an impulsive break below 425 pivot support. SEC also broke below 79k major support on August 11.Taiwan is prone to follow as flows taper into tech given NDX fade/bend risk on higher yields. Taiwan high degree bear divergence warns of a downside surprise in late August/September.

Following up on our short rotation into Korea and Taiwan. Kospi 200 broke the 425 support in an aggressive nature after the USD/KRW broke out above 1,152.Korea short from 435-44 zone (437 entry) saw an impulsive break below 425 pivot support. SEC also broke below 79k major support on August 11.Taiwan is prone to follow as flows taper into tech given NDX fade/bend risk on higher yields. Taiwan high degree bear divergence warns of a downside surprise in late August/September.

Korea Support Break with Taiwan to Follow

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.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.

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.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: Will Asian Currencies Continue to Underperform?

We are not expecting the FOMC meeting tomorrow to be market-moving. Having said that, with the (negative) correlation between the US dollar and EM currencies the highest since 2012, any implications for the dollar from the meeting tomorrow would ripple through EM currencies. This impact is likely to get exacerbated by the rising correlations within the EM FX universe, which implies that we are currently in a "risk-on/risk-off" period.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.

We are not expecting the FOMC meeting tomorrow to be market-moving. Having said that, with the (negative) correlation between the US dollar and EM currencies the highest since 2012, any implications for the dollar from the meeting tomorrow would ripple through EM currencies. This impact is likely to get exacerbated by the rising correlations within the EM FX universe, which implies that we are currently in a "risk-on/risk-off" period.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: Cross-Correlations Between EM Currencies Rise Sharply

South Korea

The South Korean won is the official currency of The Republic of Korea (South Korea). 

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KRW (USDKRW CURNCY)

FX Dashboard: US Dollar, Commodities, and EM Currencies

We discuss our base-case view for the US dollar along with the risk scenarios and their implications for EM currencies. We also discuss the...

Gautam Jain, PhD, CFA

Alpha Bites: Take Profits on Long Indian Rupee Vs Short Korean Won

India’s economic recovery has resumed after the deadly second wave of coronavirus and the RBI turned slightly hawkish, allowing us to close the...

Gautam Jain, PhD, CFA

Korea Support Break with Taiwan to Follow

Following up on our short rotation into Korea and Taiwan. Kospi 200 broke the 425 support in an aggressive nature after the USD/KRW broke out above...

Thomas Schroeder

FX Dashboard: Will Asian Currencies Continue to Underperform?

Asian currencies have underperformed and are likely to continue doing so because of the impact on growth and monetary policy from the low...

Gautam Jain, PhD, CFA

FX Dashboard: Cross-Correlations Between EM Currencies Rise Sharply

While we are not expecting the FOMC meeting tomorrow to be market-moving, we need to watch for any impact on the dollar as it would ripple through...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

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