– The latest run of our emerging market currency model, the Scorecard, suggests being long the BRL, PLN and IDR and being short the PHP, TWD and HUF in September 2011 (Exhibit 1). This is largely in line with our fundamentals-based currency views where we are bullish the BRL, IDR and PLN and bearish the TWD.
– The score for the ZAR recorded the largest increase in August due to an improvement in the government budget balance and reduced central bank intervention to weaken the currency. The HUF saw the largest fall in score because of the sharp weakening in growth data and our economist’s expectations for lower real central bank policy rates.
– The July 2011 Scorecard advocated being long BRL, PLN and IDR and being short ZAR, PHP, CNY and TWD in August 2011. This generated an estimated return vs USD of -0.3% in August. The year-to-date notional gains from our Scorecard strategy are about 7.9%.
– The July Scorecard outperformed a strategy of going long the three currencies with the highest carry and short the three currencies with the lowest carry. This “carry basket” notionally returned an estimated -2.9% vs USD. It also outperformed a strategy of buying and holding all 17 EM currencies vs USD (the “index”), which notionally returned an estimated -2.2% vs USD.
What to make of the August 2011 Scorecard?
The latest run of our emerging market currency model, the Scorecard, suggests being long the BRL, PLN and IDR and being short the PHP, TWD and HUF in September 2011 (Exhibit 2).
Life at the extremes: Long BRL, PLN and IDR
BRL, PLN and IDR remain in the top three for a fourth consecutive month. This is largely aligned with our fundamentals-based currency views. The IDR remains our preferred carry long in the Asian region. Despite Brazil’s monetary policy committee’s unexpected policy rate cuts, the BRL still has the highest carry in the EM space and we think any sell-off is likely to be limited. The score for the ZAR recorded the largest increase in August due to an improvement in the government budget balance and reduced central bank intervention to weaken the currency. (Exhibit 3).
Life at the extremes: Short PHP, TWD and HUF
The PHP and HUF joined the TWD scores in the bottom three this month. The HUF saw the largest fall in score because of the sharp weakening in growth data and our economist’s expectations for lower real central bank policy rates. The PHP scores also suffered due to our expectation that the real central bank policy rates will fall further this year.
July 2011 Scorecard posted a -0.3% return
Being long BRL, PLN and IDR and being short ZAR, CNY, SGD and TWD in August 2011, as advocated by the end-July 2011 Scorecard, would have generated an estimated total return vs the USD of about -0.3% from 27 July 2011 to 27 August 2011. The total return is defined as the change in the spot rate plus the carry vs the USD.
– The Scorecard outperformed a strategy of being long the three currencies with the highest carry and being short the three currencies with the lowest carry (which we refer to as the “carry-basket” return). The carry basket returned an estimated -2.9%. It also outperformed a strategy of buying all 17 of the EM currencies in our sample against USD (which we refer to as the “index” return). The index return was an estimated -2.2%.
For a detailed breakdown of the country scores and the returns for the Scorecard, index, and carry basket since May 2011, please refer to the Appendix, Exhibit 7. Readers can also analyse the complete history of Scorecard results in the FX section of our interactive Locus analytics platform.
Scorecard’s notional performance since inception: 63.2%
Notionally, a portfolio process that bought the three currencies with the highest scores and sold the three currencies with the lowest scores has generated positive total returns in USD terms of 62.7% since inception in January 2008. This compares with an index return of 13.3% and a carry-basket return of 11.6% (Exhibit 5).
Since inception, the Scorecard has recorded positive notional returns in 27 out of 43 months or 63% of the time. Over that period, the Scorecard has outperformed both the index return and the carry-basket return by an estimated average of 0.83 and 0.85 percentage points per month, respectively. This continues to highlight the value of a systematic approach.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS