As US and global growth expectations are being revised higher, with the US set to launch a significant fiscal package in 2021, commodity prices and EM economies should benefit. But as the rise in US Treasury yields, now driven by real yields, gathers momentum, the overall impact could end up as disruptive for EM currencies. With the impact of global factors being mixed for EM currencies, it is important to measure whether EM currencies are priced as cheap or expensive to the global environment. In addition, we aim to assess whether there is differentiation across EM currencies in the pricing of global factors.
We further developed the methodology used in Feb 2020 publication called “Impact on EM currencies from coronavirus” by taking the following steps:
- We have ‘cleaned’ the data by taking the logarithm of the series, and then the first difference for the variables that were shown not to be stationary.
- We have included not only the first axis but the first two axes.
- We have allowed for the direct impact of the factors on the dependent variable without inclusion of lags and performed different robustness checks.
We applied the methodology to the global index of EM currencies vs. USD.
We implemented the methodology for 22 EM currencies and provide the example of USD/MXN.
- We have increased the explanatory power of our model with the inclusion of the second axis compared to our Feb 2020 publication.
- EM currencies vs. USD are cheap compared to global factors as of end-February 2021.
- We confirm a differentiation across EM currencies in the pricing of global factors.
- Our analysis shows that MXN has lagged the improvement in global factors.
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Keyword: EM currencies, execution services, currency hedging, currency research, global factors, return investment, passive hedging, currency overlay.