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Writer's pictureRosbel Durán

⚠️ TWI Emerging Market - Developed Market

  • We notice the difference between the Federal Reserve's USD trade weighted baskets has come up from the half -20s seen during Q3/Q4 of last year

  • DM-EM TWI reached -24 in Q3 of 2020, this was a low going back to 2006 data, now the spread is at -19. The USD TWI EM has led the TWI DM for most of the period, except early 2006 and 2015. The latter can be attributed to declines in EUR and JPY, pushing the developed market basket lower vs the USD

  • Given the monetary policy picture, the gap between these indexes is hardly pictured to go back to the lows seen last year, driven by USD TWI EM. Emerging market central banks are currently endeavoring a hawkish campaign together, USD strength vs EM is limited from here, unless volatility spiked

  • Having the U.S. outpacing DM peers in vaccination and re-opening could push the USD TWI DM higher, in a 'catch up' fashion. Australian lockdowns, depressed European tourism, covid cases spiking in Japan. Of course, non-linearity can be expected within the G10FX. NZD and GBP having a better position in macroeconomic terms vs peers, Canada belongs to this relative strength group too

  • The last time this gap was closed, the USD/G10 gains were mostly seen vs. EUR and JPY. Today, if USD accelerated its recovery divergence, it would be in better standing vs. these low yielders, I'd add CHF to the watch list.


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