Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

With the dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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 dollar strengthening this month, EM currencies have suffered, which is reminiscent of a similar episode in Q1. However, there is greater differentiation this time around, both on a regional basis as well as at the country level. We go over the outliers to identify the reasons they did not react entirely based on their respective betas. If there is no explanation for the deviation, then the idiosyncratic behavior is likely not justified and may represent a trading opportunity.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: Winners and Losers in EM FX Amidst Dollar Strengthening

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?

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?

In this week’s Alpha Bites, we recommend buying the Chilean peso (CLP) against the South African rand (ZAR). The Chilean peso has been among the worst performers in EM over the past 6 months despite the recent hawkish surprise by its central bank. In contrast, the rand has fared much better despite worse macroeconomic fundamentals. Specifically, growth forecasts have been revised upwards for Chile but downwards for South Africa. The same is true with regards to inflation dynamics, which imply that Chile’s central bank should continue to raise rates while South Africa should stay on hold for the time being. Politics is a factor weighing on Chile, but the related risk premium is excessive in our view.

In this week’s Alpha Bites, we recommend buying the Chilean peso (CLP) against the South African rand (ZAR). The Chilean peso has been among the worst performers in EM over the past 6 months despite the recent hawkish surprise by its central bank. In contrast, the rand has fared much better despite worse macroeconomic fundamentals. Specifically, growth forecasts have been revised upwards for Chile but downwards for South Africa. The same is true with regards to inflation dynamics, which imply that Chile’s central bank should continue to raise rates while South Africa should stay on hold for the time being. Politics is a factor weighing on Chile, but the related risk premium is excessive in our view.

Alpha Bites: Long Chilean Peso Vs Short South African Rand

South Africa

The South African rand is the official currency of The Republic of South Africa.

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ZAR (USDZAR CURNCY)

FX Dashboard: Winners and Losers in EM FX Amidst Dollar Strengthening

In the latest bout of dollar strengthening, we go over the outperformers and underperformers among EM currencies to identify potential trading...

Gautam Jain, PhD, CFA

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

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

Alpha Bites: Long Chilean Peso Vs Short South African Rand

We recommend Long Chilean peso/Short South African rand on better growth dynamics and a more hawkish central bank in Chile vs South Africa. The...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)