Resumo do Relatório

FX Dashboard: Revisiting the US Dollar View and Its Implications for EM Currencies

26/04/2022
Avaliar este relatório: 1 voto. média: 5,00 out of 51 voto. média: 5,00 out of 51 voto. média: 5,00 out of 51 voto. média: 5,00 out of 51 voto. média: 5,00 out of 5 (1 votes, average: 5,00 out of 5)
You need to be a registered member to rate this.
Loading...
Currencies Emerging Markets Fixed Income Global Strategy Interest Rates Macroeconomia USA

In the note The US Dollar View and Its Implications for EM Currencies from February, I stated that I expected the dollar to remain strong and, if anything, potentially appreciate further. As the US dollar (DXY index) approaches its highest level in a decade in line with my expectation, it is time to revisit my view.

In summary, I continue to expect the dollar to remain strong in the near term, which should act as a headwind for EM currencies. As the year progresses, I expect the dollar to weaken and the environment to turn more supportive of EM currencies.

The following charts explain the rationale behind my view:

  • Interest-rate differential supports the dollar but doesn’t explain the recent spike: With the Fed likely to ramp up the pace of rate hikes and embark on quantitative tightening at the next meeting in May, the curve is pricing in more aggressive rate increases and the long end of the US yield curve has moved higher. The US 10y yield is approaching 3%, the highest level in three years. Higher interest rates relative to other developed economies have been supporting the dollar, especially against the yen which is being used as a funding currency with the BoJ holding rates steady. However, the interest-rate differential doesn’t explain the most recent spike in the dollar as it appreciated 4% over the past month alone. Instead, risk aversion may be a factor as well arising from several sources:
    • The risk of the Fed tightening too aggressively may induce a recession in the US.
    • The risk of further sanctions on Russia, if they include oil and gas imports, may lead to a recession in the EU.
    • China’s Zero-Covid policy is leading to new lockdowns, worsening the ongoing economic slowdown in the country.

Data Source: Refinitiv

 

  • Speculative positioning doesn’t explain the latest dollar move: While speculative positioning correlates well with the dollar, they tend to follow dollar moves rather than lead. Nevertheless, this time around, it is clear from the chart below that positioning by funds was not anticipating the recent spike in the dollar.

Data Source: Refinitiv, CFTC

 

  • Interest rate volatility best captures the dollar strength: The recent dollar spike coincides with the sharp rise in US rates volatility since early 2021. This makes fundamental sense. The dollar strengthens when US growth outpaces the rest of the world (the right end of the dollar smile) or when risk aversion rises (the left end of the dollar smile). The increase in rates volatility is because the market is struggling to price a terminal value for the Fed Funds rate. On one extreme, the risk of recession has risen as outlined above, while on the other end of the spectrum, the Fed is tightening monetary policy to anchor inflation – both of which support the dollar while keeping rates volatility elevated.

Data Source: Refinitiv

 

  • Dollar is expensive: Given the market forces described above, the dollar is likely to remain strong in my view. Indeed, it is likely that the dollar index breaches the decade-high level of 103. However, once the volatility of US rates starts falling, the dollar can start to weaken, assuming there is more clarity on the recession risk by then. In other words, a drop in rates volatility is a necessary, though not sufficient condition for the dollar to depreciate. This is because:
    • The growth differential is no longer in favor of the US. In 2020 and 2021, the US growth exceeded other developed economies by 2.6% and 2.1%, respectively. In 2022, however, the US is expected to grow at about the same pace as advanced economies on aggregate (3.7% vs 3.3%), according to IMF forecasts.
    • The US dollar is the most expensive it has been in real effective exchange rate (REER) terms in more than two decades as the chart below shows.

Data Source: BIS

 

  • EM currencies are highly (negatively) correlated with the dollar: The dollar’s strength should act as a headwind for EM currencies because the negative correlation of EM currencies to the US dollar is currently close to its highest in a decade. Conversely, if and when the dollar starts depreciating, EM currencies should perform well.

Data Source: Refinitiv; Note: EM FX = equally weighted index of spot returns of 21 currencies excluding Russian ruble

 

  • Despite the weakness, EM currencies have outperformed: Although EM currencies have weakened as the dollar strengthened, they have surprised positively. Historically, the beta of EM currencies to the dollar is close to -1. This year, however, as the dollar has appreciated by 5.5%, EM currencies have weakened by only around 1.5%. The outperformance of EM currencies has been due to:
    • EM currencies had underperformed in the early phase of the pandemic in 2020 and never recovered, leaving them attractive in terms of relative valuations.
    • As the chart on REER above shows, EM currencies are at their cheapest in over 15 years.
    • Latin American and CEEMEA countries have been ahead of DM central banks in terms of monetary tightening. Indeed, real rates are high across these countries which are resulting in high carry for many currencies, even relative to their high volatilities.

Data Source: Refinitiv; Note: EM FX = equally weighted index of spot returns of 21 currencies excluding Russian ruble

 

  • Differentiation within EM: While EM currencies have performed well on aggregate, there has been a fair bit of dispersion in their performances. As such, while the overall environment may not be supportive of EM currencies, it is conducive for relative-value trades to capitalize on differences across countries based on:
    • Macroeconomic developments
    • Politics and upcoming elections
    • Geopolitics – i.e., proximity or not to the war

Indeed, I have written on several currencies recently along these lines, including:

Data Source: Refinitiv; Note: EM FX = equally weighted index of spot returns of 21 currencies excluding Russian ruble

Data Source: Refinitiv; Note: EM FX = equally weighted index of spot returns of 21 currencies excluding Russian ruble

 

  • Stick with a euro hedge: I have been recommending a euro (EUR) hedge for a diversified portfolio for EM currencies (see Value of Euro as a Hedge for EM Currencies in Times Like These), which has performed well, especially of late. I recommend maintaining the hedge because the euro will react similarly or possibly worse than EM currencies if the recession risk plays out.

Data Source: Refinitiv; Note: EM FX = equally weighted index of spot returns of 21 currencies excluding Russian ruble

 

Best Longs / Best Shorts

  • On the list of underperformers based purely on my models in the attached FX Dashboard pdf, I replaced Hungarian forint against the euro (EURHUF) with Chinese yuan (CNY), Malaysian ringgit (MYR), and Korean won (KRW). The z-score of the former receded while they went above 1 for the ones I added.
  • The list already had Taiwan dollar (TWD) and Israeli shekel (ILS) on it.
  • From the list of outperformers, I removed Colombian peso (COP) and Peruvian sol (PEN) as their z-scores receded.
  • The list now consists only of Brazilian real (BRL).

Best Crosses

  • The list of the preferred relative-value trades based purely on my models shrunk to Short BRL vs Long Hungarian forint (HUF) or Polish zloty (PLN) or TWD or Romanian leu (RON).
  • The 3m expected returns for these pairs are in the high range of 15-18% (not annualized), assuming mean reversion.
Gautam Jain

Gautam Jain
Estrategista - Ph.D, CFA
New York, EUA

Aviso legal

DISCLAIMER: Este Relatório de Análise foi elaborado e distribuído pelo Analista, signatário unicamente para uso do destinatário original, de acordo com todas as exigências previstas na Resolução CVM nº 20 de 26 de fevereiro de 2021 e tem como objetivo fornecer informações que possam auxiliar o investidor a tomar sua própria decisão de investimento, não constituindo qualquer tipo de oferta ou solicitação de compra e/ou venda de qualquer produto. As decisões de investimentos e estratégias financeiras devem ser realizadas pelo próprio leitor, os Analistas, ou a OHMRESEARCH não se responsabilizam por elas. Os produtos apresentados neste relatório podem não ser adequados para todos os tipos de investidores. Antes de qualquer decisão de investimentos, os investidores deverão realizar o processo de suitability no agente de distribuição de sua confiança e confirmar se os produtos apresentados são indicados para o seu perfil de investidor. A rentabilidade de produtos financeiros pode apresentar variações e seu preço ou valor pode aumentar ou diminuir num curto espaço de tempo. Os desempenhos anteriores não são necessariamente indicativos de resultados futuros. A rentabilidade divulgada não é líquida de impostos. As informações presentes neste material são baseadas em simulações e os resultados reais poderão ser significativamente diferentes.
O(s) signatário(s) deste relatório declara(m) que as recomendações refletem única e exclusivamente suas análises e opiniões pessoais, que foram produzidas de forma totalmente independente e que a OHMRESEARCH não tem qualquer gerência sobre este conteúdo. As opiniões aqui expressas estão sujeitas a modificações sem aviso prévio em decorrência de alterações nas condições de mercado. O Analista responsável pelo conteúdo deste relatório e pelo cumprimento da Resolução CVM nº 20/21 está indicado acima, sendo que, caso constem a indicação de mais um analista no relatório, o responsável será o primeiro analista credenciado a ser mencionado no relatório. Os analistas cadastrados na OHMRESEARCH estão obrigados ao cumprimento de todas as regras previstas no Código de Conduta da APIMEC para o Analista de Valores Mobiliários e no Manual de Controles Internos para Elaboração e Publicação de Relatórios da OHMRESEARCH. De acordo com o art. 21 da Resolução CVM nº 20/21 caso o Analista esteja em situação que possa afetar a imparcialidade do relatório ou que configure ou possa configurar conflito de interesse, este fato deverá estar explicitado no campo “Conflitos de Interesse” deste relatório.
O conteúdo deste relatório é de propriedade única do Analista signatário e não pode ser copiado, reproduzido ou distribuído, no todo ou em parte, a terceiros, sem prévia e expressa autorização deste Analista. Todas as informações utilizadas neste documento foram redigidas com base em informações públicas, de fontes consideradas fidedignas. Embora tenham sido tomadas todas as medidas razoáveis para assegurar que as informações aqui contidas não são incertas ou equívocas no momento de sua publicação, o Analista não responde pela veracidade das informações do conteúdo.
Para maiores informações, pode-se ler a Resolução CVM nº 20/21 e o Código de Conduta da APIMEC para o Analista de Valores Mobiliários. Este relatório é destinado exclusivamente ao assinante da OHMRESEARCH que o contratou. A sua reprodução ou distribuição não autorizada, sob qualquer forma, no todo ou em parte, implicará em sanções cíveis e criminais cabíveis, incluindo a obrigação de reparação de todas as perdas e danos causados, nos termos da Lei nº 9.610/98 e de outras aplicáveis.