No sign of panic in the major equity markets today, but the USD has made a fairly significant move here and our EM risk indicators are showing some divergence from the complacency elsewhere. Will the G20 encourage this trend or reject it?
Carry Trade Model – all things normal?
A look at our carry trade risk model shows very close correlation of the model with a sample US dollar trade as, on the surface of things, at least, correlation across markets remain very tight. Note that the sample USD carry basket is now trading back below its previous high – an interesting technical reversal, though we’d like to see it hold on the other side of the G20 meeting here.
However…if we zoom in on one of the indicators showing the most divergence lately – emerging market bond spreads and currencies – we can see that there are signs of a bottom in place on the EM rally as far as underlying risk appetite goes in EM bond spreads and currencies goes, while EM equities have continued to spike further. Is this an overshoot?
And is the stronger USD a risk to the excessive complacency in risk…as we chart EM equities versus the USD/G10?
And vs. ZAR (can anyone spot the correlation here?), is the stronger USD leading the way for broader risk appetite here?
If risk is overdone here, then the currencies most at risk should be those currencies that performed best on the upside of the recent QE liquidity speculation bubble– a classic high beta behavior. In the G-10, the high beta currencies are AUD and NZD. Those not willing to look at buying the USD might consider piggy-backing the greenback via CAD, which has shown some signs of perking up lately, i.e., short AUDCAD and short NZDCAD trades might be a popular way to express a reversal in the very stretched valuation in the antipodeans.
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