As we wrote in our previous post, several FX crosses have started moving rather violently over past days. The biggest mover, continuing to get weaker, is the Turkish Lira, down 1.6% as of writing.
Increased volatility, especially in the EM currency space is to be watched carefully. EM is far out on the risk curve and is often a good forward looking “indicator” for global risk.
The below chart shows the EEM US. Note the rising wedge and the poor price action over past days. Watch the red trend line carefully. Last year´s market rout started in the Emerging markets space first.
For now, the EM “VIX”, VXEEM index, remains trading relatively depressed. At these levels EM hedges are fairly inexpensive.
EM FX drives a lot of the global risk sentiment according to us. The chart below shows clearly how the EM FX space moves in close relationship with EM equities, EEM US. Equities continue to trade resilient and almost complacent, but recent developments in EM FX crosses as well as other FX pairs having started to move, could quickly spill over to equities.
Source, charts by Bloomberg