德银-新兴市场-外汇市场-新兴市场外汇记分卡更新：RUB与BRL领先群雄-20171121-Deutsche_Bank-EM_FXEM_FX_Scorecard_update,RUB_and_BRL_leading_the_pack_13页_693kb

Summary of EM FX Scorecard Update (21 November 2017)

Core Content

This document provides an update to the Deutsche Bank Emerging Markets (EM) Foreign Exchange (FX) Scorecard, which evaluates 22 EM currencies based on macroeconomic and financial/technical factors to determine their attractiveness for long or short positions. The scorecard is designed to offer a consistent quantitative framework for comparing EM currencies and serves as a rules-based overlay to existing EM FX Strategy frameworks.

Main Points

• Scorecard Overview: The scorecard ranks currencies from most to least attractive for long positions (rank 1) to best short positions (rank 22). It is divided into two halves: Macro (longer-term) and Financial/Technical (shorter-term).
• Top Longs: RUB, BRL, HUF, and INR are ranked among the best longs in EM.
• Top Shorts: ILS, PHP, RON, and CZK are ranked among the best shorts in EM.
• Middle of the Pack: PLN, TWD, CLP, and COP are in the middle.
• Key Variables:
  • Macro Variables: Long-term FX valuation, growth momentum, inflation, real rates, and flows (basic balance).
  • Financial/Technical Variables: Carry, short-term valuation, momentum, positioning, and RSI.
• Forward-looking Adjustments: The scorecard now includes forward-looking variables such as 1-year ahead ex ante real rates and forecasted inflation for the coming months.
• Positioning: Includes FX options positioning (3m 25-delta risk reversal) and local currency bond positioning (foreign ownership share of local currency government bonds).

Key Information

Top Longs and Shorts

• Best Longs: RUB, BRL, HUF, and INR.
• Best Shorts: ILS, PHP, RON, and CZK.
• Middle of the Pack: PLN, TWD, CLP, and COP.

Strategy Views

• Bullish on RUB and BRL: Both have strong growth momentum, low inflation, high carry, and good defensive metrics. Recent weakness offers an opportunity to enter longs.
• Bullish on MYR: It is cheap, has better-than-expected growth, tame inflation, light positioning, and strong momentum.
• Bearish on ILS and PHP: These currencies have expensive valuations and low real rates, which are major drags on their rankings.

Macro vs. Financial Ranks

• Macro Half: RUB and BRL score well, while ILS and PHP score poorly.
• Financial Half: INR, RUB, and BRL are among the best longs from a technical perspective.

Construction of the Scorecard

• The scorecard is based on 10 factors divided into 5 macro variables and 5 financial/technical variables.
• Macro Variables:
  1. Long-term FX valuation (TWI valuations)
  2. Growth momentum (MMI and output gap proxy)
  3. Inflation (3-year rolling z-score and 3m ahead forecast)
  4. Real rates (current and 1-year ahead ex ante)
  5. Flows (basic balance as % of GDP)
• Financial/Technical Variables:
  1. Carry (vol-adjusted 3m FX implied yield and 10Y swap rate)
  2. Short-term valuation (12-month regression model)
  3. Momentum (short-term vs. long-term moving average crossover)
  4. Positioning (FX options and local currency bond foreign ownership)
  5. RSI (Relative Strength Index)

Short-term FX Valuation Model

• The model uses a 12-month regression of FX spot on financial variables like S&P, crude, DXY, UST 10Y yields, local equities, CDS, risk reversals, and local-to-US 2y swap spread.
• Cointegration is used to ensure valid regression results.
• Residuals are calculated as the difference between actual FX spot and predicted FX 'fair value'.
• Z-scores are computed from these residuals to determine over/undervaluation.
• The combination of 12-month regression and 18-month z-scores was determined to provide the best returns through backtesting.

Conclusion

The updated EM FX Scorecard offers a comprehensive and forward-looking assessment of EM currencies. It highlights RUB and BRL as attractive longs due to their strong fundamentals and recent weakness, while ILS and PHP are considered attractive shorts due to their expensive valuations and low real rates. The scorecard is a valuable tool for investors to make informed decisions in the EM FX market, incorporating both macroeconomic and financial/technical indicators.