Chief Macro Strategist
Summary: Support for carry trades decelerated sharply over the last week as the US dollar firmed, though against the lowest yielding funding currencies like the Japanese yen, carry trades have just about managed to tread water in places. Further USD strength from here would begin to take the big dollar into new territory, so the USD outlook remains key for the EM currency outlook while yields are likely a bigger focus for the lowest yielding funding currencies.
Emerging market currencies have put in a weak performance this week, largely driven by a stronger US dollar, as the strength in the big dollar has generally spread across the board. We registered a modest pickup in risk measures as well, but sharply stronger bond yields just ahead of this report drove an interesting drop in some of the low-yielding funding currencies, especially the Japanese yen. Whether the USD continues to strengthen is likely the pivotal question for EM currencies, while the funding currencies will look more intently at the bond market to see if the recent spike in yields is an anomaly or could follow through - Japan's yields are the most volatile relative to their recent history as the country has implemented a new tax rate increase as of October 1, the large government pension fund is increasing the allocation for foreign bond purchases, and the Bank of Japan is seen as likely to concentrate on steepening the yield curve (mostly through rate cuts at the front-end it is assumed) or bringing some other form of easing at its meeting at the end of October.
Chart: Saxo Bank Global Risk Indicator
Our global risk indicator was knocked back from levels that are rarely sustained for any length of time (anything above 1) but are not yet cause for worry by any means, but the very recent bounceback of the last couple of sessions looks actually like a suspicious misread from our data provider for the EM credit spread component of our indicator index (we use a JP Morgan EM index) and we may look to replace that indicator because a more granular look at individual EM credit spreads suggests a sharp worsening rather than than indicator's improvement. Stay tuned.
Carry Trade Short Term Performance
We present the shorter term performance of higher carry currencies again this week to point out the general weakness in EM currencies against the hard charging US dollar. Leading the downside is the South African rand, likely due to the exuberance of the correction in precious metals markets this week, particularly platinum. Basically every currency in our EM universe was lower versus the USD over the last week save for the Philippine Peso and the risky Turkish lira is curiously doing its own thing versus the strong USD at the moment as well.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)