The chart below shows the rolling 3-month correlation between selected EM currency returns and the 1st (systemic) Principal Component of the universe of EM currency returns. Chinese yuan (CNY) correlates very closely with this common, systemic factor during 2018. The currency least correlated with systemic risk is the Turkish lira, which has idiosyncratic problems all its own. The Mexican peso starts the year highly correlated with systemic risk, but its degree of correlation drops off sharply.

This gauge tells us that the threat of trade war was the main driver of systemic risk across the emerging market currency universe (China took the brunt of the threat and depreciated its currency as a consequence of monetary easing, a response to the trade war threat).

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