Source: Bloomberg, Unigestion, as of 26.10.2021
Emerging market currency markets can provide attractive opportunities but also tend to be higher risk. Indeed, investors often face heightened political risk, higher volatility and lower liquidity than traditional developed world foreign exchange markets. The last 18 months have been particularly challenging for investors with the pandemic adding another dimension and resulting in even higher volatility. This significantly decreased the risk / reward of being long in emerging market currencies. In fact, 3-month implied volatility in these currencies has only recently returned to its average of the last four years but remains far from the lows observed pre-pandemic in early 2020. With the emerging world still lagging the developed one in terms of the post-Covid recovery, thanks in part to their slower access to vaccines, volatility and the challenging conditions for investors are both likely here to stay, at least in the short term.
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