Emerging Markets FX space has been very calm recently, despite the global trade situation. The JPM EM FX index recently popped higher after the several months long consolidation phase.
Global macro leading indicators are suggesting a high probability for a contraction in global trade, but whether the Emerging space is complacent or not is to be seen.
The entire move higher in Emerging FX volatility we saw during last summer is gone. The EM FX vol index has recently taken new recent lows and trades at levels last seen in June 2018, before the pop higher that followed.
Should the global trade situation deteriorate further, the current Emerging Markets FX vol calmness could prove to be way to complacent.
The below chart shows the EM FX vol index (white), the Emerging Markets equity vol, VXEEM (orange) and the VIX (green). Note how, especially, the VXEEM has been calmer in its movements than the VIX. This is rather a rather rare event.
Leading into the October sell off in developed world equities, the EM FX vol space was the canary in the coalmine. This has totally reversed, but just because the EM space is calm now doesn’t mean it will stay this calm going forward.
We are watching this space closely, so stay tuned!
Source, charts by Bloomberg