FxWirePro: Snippets and road ahead of VXY and EMFX vols in H2’2019

The last month has seen plenty of volatility with EM FX continuing to trend weaker, with some more significant volatility in Argentina and Turkey. This weakness has been the result of factors that echo 2Q’18’s themes, namely a stronger USD given US growth has outperformed the rest of the world, which exposes weakness in EM countries. 

The over-weights in EMFX has been cut to medium-weights a month ago given the strong 1Q performance, larger positioning, a still mixed global growth picture, and EM idiosyncratic sources of volatility. This still feels the right position to have in EM risk as we head into May. The fundamental picture for EM still has a growth upturn in 2Q’19 (as per economists’ projections), thus the macro risks to EM assets are still largely coming from outside EM.

We then focus on a couple of EM case studies. Similarly, as for G10 vols, EM FX vol have generally continued the steady decline following the sharp repricing higher as occurred last August, with the JPM VXY EM Index roughly just 2 vol points higher than the summer-2014 all-time low recorded by the index. Compared to G10, at least one episode has caught markets attention this year in terms of a spike of vol levels, USDTRY (refer 1st chart).

Given the elevated vol levels, the strategy had enjoyed a steady positive performance, until a sudden 10% drop in the currency around 22 March caused a 35% drop in the benchmark short-vol strategy. Filtering allowed cutting the drawdown by around 16%, although the violent and sudden eruption of stress conditions did not allow a wider reduction of the maximum drawdown. Since the end of March, both benchmark (+7.8% YTD) and filtered (+6.4% YTD) strategies enjoyed a solid recovery.

USDCNH (see 2nd chart) is another currency which has received close scrutiny from market players due to the ongoing US/China trade dispute. The allocation to short-vol as suggested by the timing model has ranged between 90% to 100% for most of the year: the filtering strategy has helped to reduce the 2% drawdown as experienced by short- vol at the beginning of January, and to overall outperform the benchmark in terms of PnL realized so far this year (+4.0% vs +3.8%). Once again, we deem the performance of the timing model perfectly consistent with its expected behavior. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 34 levels (which is mildly bullish), while hourly USD spot index was at -57 (bearish) while articulating at (12:06 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex