Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

After being one of the best performing EM currencies this year, the tide has turned for the South African rand in our view. We expect headwinds from the growth outlook worsening as a result of the July riots and a slow vaccination pace. With the central bank likely to stay on hold through 2021, the currency's carry should drop a well. Moreover, the tailwind from commodities may also be behind.

After being one of the best performing EM currencies this year, the tide has turned for the South African rand in our view. We expect headwinds from the growth outlook worsening as a result of the July riots and a slow vaccination pace. With the central bank likely to stay on hold through 2021, the currency's carry should drop a well. Moreover, the tailwind from commodities may also be behind.

FX Dashboard: South African Rand’s Recent Underperformance to Continue

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

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US Treasury yields and the Dollar, perhaps unsurprisingly, have risen in the wake of today’s strong US labour market report. However, we think it would be a stretch to argue that markets have “hard-baked” in their view that the Federal Reserve will announce its tapering plans potentially as early as the Jackson Jackson Hole Symposium on 26-28 August. A case perhaps of once bitten twice shy and for good reason in our view.We have been moderately bullish the GBP/EUR cross since late-June and the cross briefly traded above 1.18 this afternoon, its strongest level since February 2020. We maintain a positive outlook in the remainder of Q3. The Kiwi Dollar has been the fourth strongest major currency since the Federal Reserve’s policy meeting on 16th June. The Kiwi Dollar NEER has so far in August appreciated about 0.9%, confounding historical patterns which on average in 2010-2019 saw the currency weaken 0.9% in the month of August. However, the currency may not fare quite as well in Q4, in our view – the theme of our next FIRMS report.Conversely, the Thai Baht has underperformed but it’s not just been a tourism issue.

US Treasury yields and the Dollar, perhaps unsurprisingly, have risen in the wake of today’s strong US labour market report. However, we think it would be a stretch to argue that markets have “hard-baked” in their view that the Federal Reserve will announce its tapering plans potentially as early as the Jackson Jackson Hole Symposium on 26-28 August. A case perhaps of once bitten twice shy and for good reason in our view.We have been moderately bullish the GBP/EUR cross since late-June and the cross briefly traded above 1.18 this afternoon, its strongest level since February 2020. We maintain a positive outlook in the remainder of Q3. The Kiwi Dollar has been the fourth strongest major currency since the Federal Reserve’s policy meeting on 16th June. The Kiwi Dollar NEER has so far in August appreciated about 0.9%, confounding historical patterns which on average in 2010-2019 saw the currency weaken 0.9% in the month of August. However, the currency may not fare quite as well in Q4, in our view – the theme of our next FIRMS report.Conversely, the Thai Baht has underperformed but it’s not just been a tourism issue.

We suggest taking profits on our long-standing recommendation to buy the Mexican peso against the Canadian dollar. The peso has been among the best-performing currencies in EM this year helped by the central bank’s surprise rate hike at the last meeting. The Canadian dollar, meanwhile, has underperformed following last month’s dovish taper by the central bank. We remain constructive on the peso but opt to close the trade as we see the risk that the central bank conveys a dovish message at the next meeting even as it raises the policy rate.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 suggest taking profits on our long-standing recommendation to buy the Mexican peso against the Canadian dollar. The peso has been among the best-performing currencies in EM this year helped by the central bank’s surprise rate hike at the last meeting. The Canadian dollar, meanwhile, has underperformed following last month’s dovish taper by the central bank. We remain constructive on the peso but opt to close the trade as we see the risk that the central bank conveys a dovish message at the next meeting even as it raises the policy rate.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: Take Profits on Long Mexican Peso Vs Short Canadian Dollar

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?

Thailand

The Thai baht is the official currency of Thailand. 

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FX Dashboard: South African Rand’s Recent Underperformance to Continue

We expect the South African rand to lag with the growth outlook worsening due to the July riots and a slow vaccination pace, the central bank...

Gautam Jain, PhD, CFA

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

FX Focus: USD, GBP, NZD and THB

US yields and USD have risen following strong US labour mkt report but still not clear markets expect Fed to announce tapering plans in coming...

Olivier Desbarres

FX Dashboard: Take Profits on Long Mexican Peso Vs Short Canadian Dollar

We suggest taking profits on our long-standing recommendation to buy the Mexican peso against the Canadian dollar. The peso has been the best...

Gautam Jain, PhD, CFA

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

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