Forex Investment and Currency Trading

Figure 1 traces notable Asian currency reactions to the depreciation of Vietnamese Dong (VND) against USD in the second half of 05/2008. Although market does not expect a generalized Asian currency crisis à la 1997, the short-run market jitters are apparent in the increased implied volatilities of USD/PHP & USD/IDR. Near term, corporates may find hedging these currencies more expensive, until the market can fully digest the significant VND depreciation and return to its trend. This is apparently already occurring with USD/PHP, as implied volatility has started to decrease since its
high on 05/28/2008.

Figure 2 reflects quarterly rolling correlations of daily returns between a composite index of outperforming equity sectors (incl. technology, commodities, and energy) and (directly quoted) currency pairs. The inverse correlations for the JPY and ZAR, and the widening disparity in these correlations, likely reflect the effects of carry trades, since economic conditions favoring equities are also likely to fuel the demand for ZAR at the expense of safe-haven currencies used to finance equity and ZAR purchases, and vice versa. Notably, the safe-haven vs. risky currency correlation discrepancy has stabilized at a relatively pronounced level. With commodity and energy sectors performing well,
conditions appear to support short to medium term ZAR appreciation at the expense of JPY.