The Emerging Markets Report - September 2021

Published September 7, 2021 | 2 min read

A monthly series where our experts explore current trends, investment strategies, and government policies in emerging markets around the world.

In this report, our EM FX Strategists discuss the World of One Trade and the risk ‘neutral’ box.


Key takeaways


We’ve updated our World of One Trade (WOOT) framework (below) that looks at the correlation between daily changes in equity prices (as a proxy for general risk appetite) and 50 pairs across LatAm, EMEA, and G10. The pairs inside the box are the ones with statistically insignificant correlation to risk (i.e. those that are risk-neutral).


The risk-neutral window in EM is very wide and it is likely a function of the large amount of idiosyncratic stories in LatAm and EMEA. This is compared to the developed world where only 10 out of all 45 currency pairs that can be made in G10 are currently risk-neutral.


The wide risk-neutral window in EM provides an opportunity for generating alpha based on the idiosyncratic stories while reducing exposure to changes in global risk sentiment.


World of One Trade (WOOT)

World of One Trade (WOOT)

Source: RBC Capital Markets


Political and populist policies in LatAm

Since the beginning of the year, we have been highlighting the large amount of idiosyncratic risk in Latin America under a heavy electoral and legislative calendar. Peru kicked off this year with a surprise election under a very divided country and the currency depreciated over 13%. While the timing and views about fading this move are beyond this piece, we can scan in the risk-neutral box for the best cross to position in PEN (interestingly, EUR/PEN has a low beta to risk). Chile represents the main immediate risk in LatAm FX with the presidential elections happening in around two months and the legislative decision of approving a fourth withdrawal from the pension fund system. Thus, downside risk for CLP has increased given the rise in uncertainty and the potential systemic risk ahead.


Monetary policy at the forefront in Hungary & Poland

In EMEA, it is interesting to point out that EUR/HUF and EUR/PLN are inside the risk-neutral window. This is likely a function of monetary policy and to a lesser extent, internal/external politics playing a key role in driving their respective currencies. In the case of Hungary, the central bank has been hiking rates, though the communication at the latest meeting suggests that the central bank may reduce the size of their rate hike on September 21 (and possibly even no hike). Meanwhile, PLN has been underperforming HUF this year given the NBP’s dovishness, however, we still expect the NBP to hike rates in November. On the political side, both Hungary and Poland have experienced tensions with the EU, and in Poland, the recent exit of one of the junior partners from the ruling coalition has raised questions about the risk of early elections.


Mixed results for South Africa

Over in South Africa, the status of ZAR in the WOOT is mixed – unsurprisingly, pairs such as USD/ZAR or EUR/ZAR are outside the risk-neutral window, while the risk-neutral pairs are the ones where ZAR is crossed against another “risky” currency (e.g. MXN). Thus far, ZAR has been mainly driven by the external backdrop, though the fiscal dynamics will be closely watched as we approach the Medium-term Budget Policy Statement later this year – this event will serve as a key “test” for the new Finance Minister, Enoch Godongwana. Although the new Finance Minister has signaled policy continuity on the fiscal framework, it is not yet fully clear to what extent he will adhere to the fiscal austerity stance of the former Finance Minister, Tito Mboweni.

EMEAEmerging MarketsFXG10LatAmWorld of one Traderisk