EM FX Carry Trade Update October 11, 2019
Head of FX Strategy
Summary: Several EM currencies are staging a very significant rally to close the week on the support from key geopolitical developments: first, a very likely last-ditch Brexit deal in the works after a breakthrough in negotiations, and hopes for at least trade war détente from US and China, though we still await the official word from both sides on the shape of any deal. And broadly speaking, the EM space is a patchwork affair recently, performance-wise.
Many of the major emerging market currencies (RUB, MXN, ZAR, KRW) are surging on the hopes that the US and China are headed toward some sort of a trade deal, even if it is fairly narrow in scope – particularly pivotal for many currencies in the EM space will be the degree and nature of any agreement on the CNY exchange rate as a part of the deal.
But there is certainly a variety of EM currency performance over the last week, with the Turkish lira badly stumbling because it is struggling with geopolitical concerns as the EU may move to sanction the country for its military operations in Syria and even Russian president Putin was out expressing concerns. Given the market conditions, a significant further rise in risk sentiment will likely see a number of EM central banks continuing to feel comfortable in easing rates and the Russian Central Bank chief Nabiullina was out saying as much recently as the inflation outlook there remains benign, keeping real interest rates in Russia highly positive.
Chart: Saxo Bank Global Risk Indicator
The massive resurgence in risk appetite has not entirely been absorbed in our global risk indicator – perhaps as our corporate risk indicators haven’t had time to react today (no data for today as these are based on the US closing prices) relative to the massive resurgence in quick-reaction instruments like major equity futures and currencies. As well, because this has been a sudden comeback, volatility indicators in FX have not improved like those for equities. In short – we’ll need to see conditions continuing to improve in coming days to get traction for carry trades. We also have the economic cycle to contend with, as we suspect the US is headed toward a recession – so wondering how long the after-effects of a narrow US-China trade deal and Brexit can support global risk sentiment and carry trade interest. Some risk in coming weeks that a focus on weak earnings reports offers a more challenging headwind for carry trades.
Carry Trade Short Term Performance
The shorter-term performance of EM currencies shows the variety of performance levels, with TRY badly lagging on geopolitical concerns, the Brazilian real perhaps on concerns that China will promise significant US agricultural purchases and as coffee and sugar prices are weak. On the plus side are many of the bigger EM currencies rising on the general comeback in risk sentiment.
Carry trade performance*
Among the funding currencies, short SEK has been a winner, but JPY and CHF have put in a very weak performance late this week and could be set for a further drop if the US-China trade deal continues to drive a recovery in risk sentiment and higher bond yields.
The chart below simply shows the forward carry for owning the USD versus (mostly negative yielding) funding currencies and the returns on higher yielding EM currencies versus the US dollar.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.