Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

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?

The ruble has lagged the rally in oil prices, which is partly by design following the establishment of the fiscal rule by the Russian authorities. While the benefit of the improvement of the current account should be felt over the medium term, the factors that have been relevant in the near term have been monetary policy and the risk of sanctions. Both of these are now behind in our view, indicating that the ruble should broadly be driven by its beta to EM FX in the near term.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.

The ruble has lagged the rally in oil prices, which is partly by design following the establishment of the fiscal rule by the Russian authorities. While the benefit of the improvement of the current account should be felt over the medium term, the factors that have been relevant in the near term have been monetary policy and the risk of sanctions. Both of these are now behind in our view, indicating that the ruble should broadly be driven by its beta to EM FX in the near term.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: Russian Ruble Is Lagging the Rally in Oil

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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.

We revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.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 revisit our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies. Based on current correlations, we modify the statement to say that the thesis now applies to most but not all currencies. We identify the outliers and connect them with our recent trade recommendation to buy the Chilean peso against the South African rand.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: Is Monetary Policy Still Driving FX Returns?

The Chilean central bank delivered a hawkish surprise at its meeting this week as it reacted to the sharp rise in economic activity and inflation expectations on the back of the strong monetary and fiscal accommodations. The resulting rise in short-end rates should be supportive for the currency in our view, even though the political noise going into the presidential election in November may keep its volatility high.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.

The Chilean central bank delivered a hawkish surprise at its meeting this week as it reacted to the sharp rise in economic activity and inflation expectations on the back of the strong monetary and fiscal accommodations. The resulting rise in short-end rates should be supportive for the currency in our view, even though the political noise going into the presidential election in November may keep its volatility high.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: Chilean Central Bank Boosts the Peso with Aggressive Rate Hike

Philippines

The Philippine peso is the official currency of The Republic of the Philippines. 

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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

FX Dashboard: Russian Ruble Is Lagging the Rally in Oil

In the short term, the ruble is less dependent on oil prices and more on monetary policy and sanctions risk. With both of these drivers behind, the...

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

FX Dashboard: Is Monetary Policy Still Driving FX Returns?

We modify our thesis from early July when we argued that monetary policy was the primary driver of the differentiation within EM currencies to say...

Gautam Jain, PhD, CFA

FX Dashboard: Chilean Central Bank Boosts the Peso with Aggressive Rate Hike

The Chilean central bank delivered a hawkish surprise resulting in a rise in short-end rates, which should be supportive for the currency, even...

Gautam Jain, PhD, CFA

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