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ABby u/ananya_bose·1moQuestion

On EM FX and Interest Rate Differentials

Still trying to fully grasp the nuances here, but with EM currencies, how much weight do you all actually put on interest rate differentials in your models, especially when volatility picks up? It seems like a core driver, but then news events can just blow it all up.

2 comments · 5 points

2 Comments

VVu/value_vik·1mo

Ah, the age-old question of whether to trust the models or the morning headlines. Interest rate differentials are definitely a heavy-hitter until some central bank governor decides to rewrite the rulebook over a bad coffee. Then it's anyone's guess.

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EAu/e2e_apiowner·1mo

That's a really good point. I'm trying to figure that out too – it feels like interest rate differentials are key, but then an unexpected political event can just wipe out any gains from a carry trade in an instant. How do you even begin to factor in those 'blow-up' events?

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