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Foreign Exchange

Currency indexes suffer losses in September; Still outperforms equity

Emerging markets currency indexes suffered losses in September and dipped into negative returns for the year as investors fled higher-yielding currencies for safe havens, amid market turmoil surrounding the European sovereign debt crisis, according to data from an independent index provider.

The losses again looked modest in comparison to the carnage wreaked on the equity markets, but from an absolute returns perspective the returns of the unleveraged, passive, fully funded currency indexes were disappointing. The Asian index was among the best performers, delivering a loss of -5.26% in September, compared to a -7.54% loss for the BRIC index, -7.27% for LatAm and -7.16% for CEEME. The pan emerging market index, EM Extended, was boosted by the relatively strong performance of Asia, losing -6.74%. The twice leveraged currency indexes produced comparable losses to equities. While the MSCI EM World and DJIA indexes lost -14.8% and -12.9% respectively, the EM Extended x2 lost -13.5%. Asia Index x2 lost 10.5% while CEEME Index x2 lost 14.3%. The best performing index was unsurprising was the DXY dollar index, gaining 6% in September, while it still remains negative year-to-date with a return of -0.42%.

But the index provider maintained FX indexes remain an attractive investment from a Sharpe ratio perspective, and in many cases have outperformed year to date as well. The EM Extended index has a Sharpe ratio of 1.24, with losses kept down to -2.92%. The MSCI EM World, by contrast, has a Sharpe ratio of 0.42, with a YTD loss of -23.52.

The MSCI EM Asia index comes with a Sharpe ratio of 0.5%, with returns of -21.6%. For currencies, the Asian Index comes out with a Sharpe ratio of 1.1% (0.92% for the x2 levered version), for a year to date loss of 2.48% (or -5.92%). Other regions’ FX indexes are comparable: CEEME has a Sharpe of 1.23%, for YTD losses of 2.02%, while LatAm delivered -1.9%1 with a Sharpe ratio of 0.92%.

Index Performance 
 
 Source: Independent index provider
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