Have we seen this movie before in EMFX?
There was a similar rally in EMFX last October (see chart below), when the US was in the midst of government shutdown. September non-farm payroll was delayed. S&P fell and VIX spiked with the debt ceiling breach looming. Surprisingly EMFX actually strengthened with risk aversion. Why was that?
It appeared EMFX was trading more to rates volatility than to the VIX. The rally came on the heels of the Fed’s non-taper decision on September 18. Simply the lack of data points (because of the shutdown) was enough to embolden investors to reach for yield. And no data points meant tapering could be delayed. Between October 1 (first day of shutdown) to October 9 (low in S&P), the best performing EM currencies were ZAR, TRY, IDR, MYR, INR, and the worst were ILS, RUB, MXN, and PEN. Clearly there was a bias for carry. And what ended the rally? The debt ceiling resolution on the 17th. And that’s because NFP was due to be released shortly after the federal government re-opened.
This time around the NFP didn’t come in as strong as some in the market expected. Coupled with weaker equities, some investors began to cast doubt on the growth story in the US. Equity vols are rising, but the higher VIX has not prevented EMFX from rallying. EMFX has been taking cue from rates vols instead. Stealing a page from last October, investors are happy to go after yield in the current “data vacuum” until just before next month’s tier-one data.
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