How to rank the relative attractiveness of Emerging Market currencies? In this blog post we bring together various metrics that should help investors decide on the perennial question, whether or not to hedge Emerging Market currency risk.
About Javier Corominas
Javier Corominas is the Head of Economic Research and FX Strategy at Record. Before joining Record, Javier worked as Eurozone Economist at a leading macroeconomic forecasting consultancy and holds both a BA (First Class) and MPhil degree in Economics from Cambridge University. When not musing on the economic and market predicament of countries and currencies, Javier likes to spend his time on the golf course, the squash court and trying to control the kite while still standing on his email@example.com
Entries by Javier Corominas
Sterling’s deprecation since June this year has been dramatic and many commentators have welcomed this as a way to rebalance the economy via an improving trade balance. However, this may not be the first and foremost mechanism presently at work : instead, we argue that the income balance is perhaps more important and the key adjustment mechanism in a world where trade responsiveness to currency changes is less than in the past.
Do market capitalisation driven weights make sense from a currency perspective? If not, how can we go about getting closer to a more balanced and optimal currency mix as part of international asset allocation?
Are currency markets stuck in a period of short-term mean reversion? If so, what’s driving this and what are the implications for investors?
Did safe haven flows drive an ever appreciating Swiss Franc in the run up to January 2015?
The data reveal that, on the contrary, a general lack of Swiss outflows and repatriation of foreign bonds bought by Swiss domestic investors, can explain much of the pressure on the Franc to appreciate.
Ultimately domestic investors created an insurmountable problem for the Swiss National Bank (SNB) in the run up to the removal of the peg.
Growth outperformance matters in EM over the long run, but capital flows drive short run returns in the asset class. We believe there are complementarities between both.
• Does the recent weakness and volatility in the CNH spot and short-tenor forward market herald a new era of Chinese capital outflows?
• Has the SNB reached the Zero Lower Bound? After last week’s ECB deposit rate cut, we assess the likelihood of further accommodative monetary policy in Switzerland.
• By applying a Taylor Rule approach to reveal the SNB’s own estimate of the neutral real interest rate, we estimate that there is indeed room for further interest rate cuts, especially as domestic Swiss real interest rates are still moderately elevated.
• The US has had a long standing concern about what it perceives to be excessive “currency manipulation” on the part of some countries, especially in Asia. This concern is primarily driven by the large and persistent US current account deficit, which will necessitate significant relative currency adjustments for it to at least begin to unwind.
• A problem with this view emanating from US officialdom is that the pass-through effects between currency movements and domestic inflation in the US has been shown to be weak, thus making the process of adjustment more drawn out at best, and ineffective at worst.
• The perceived direct financial cost of a Grexit for Germany is ultimately not the real cost.
• Both in terms of enhanced current account dynamics and via substantial cost savings for the sovereign issuer, there has been a direct benefit which we put in the order half a trillion Euros (conservative estimate) for Germany alone.