Risk is on
The risk rally in markets continues. Some of this is due to optimism around the reopening of economies around the world, especially the US. This should see economic activity pick up and a return of some normality. So far, we have yet to see second waves of COVID cases in any major economy, which has helped fuel the optimism.
It also helps that the European Union (EU) appears to be going down the path of sharing fiscal risk across the bloc in the form of the EU Recovery Fund. This has seen the euro strengthen and Italian spreads narrow (Chart 2).
Battered FX Bouncing Back
In FX, the biggest beneficiaries of this backdrop have been previously battered currencies such as the Brazilian real and the South African rand. Asian FX, meanwhile, has been more stable. The best performers have been the Indonesian rupiah (IDR) and Thai baht (THB, Chart 1). Nevertheless, even with stable currencies, returns can be captured through the carry earned on buying higher interest rate FX futures and selling lower interest rate FX futures.
Focusing on Asian Carry Trades
In Asia, the high-yielders are IDR, INR and PHP, while the low-yielders are TWD, JPY and SGD. A basket of these currencies – long IDR, INR, PHP and short TWD, JPY, SGD – has delivered returns of 0.5% over the past few weeks, and over 2% over the past month (Chart 3). In the current positive risk environment, we would expect FX carry trades to perform well. A carry basket, or individual Asian FX carry trades such as long INR/short TWD or long IDR/short SGD, could therefore deliver positive gains.
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