Large currency moves and equity performance

Citi equity research investigates the relation between currencies and equity markets. It suggests that typically large currency appreciation (depreciation) coincides with underperformance (outperformance) of the equity market in local currency terms. However, the currency moves tend to be larger than the equity moves. This supports the case for hedging local-currency equity exposure against currency strength and USD-based equity exposure against currency weakness. Hedge ratios should be diverse across countries, as correlation with currency weakness is a function of industry structure. Emerging market equities have historically not always correlated negatively with currencies due to the prevalence of crisis events.

(more…)

Currency dynamicis in risk-off episodes

A new IMF paper suggests that there is much more to exchange rate dynamics in “risk-off” periods than correlation-driven risk shedding. Indeed, it provides evidence that economic fundamentals, particularly external balances, re-assert themselves precisely during the first twelve weeks after market turmoil has erupted, when the asking price for incremental economic and policy risk is steep.

(more…)