EMFX Macro - Brighter horizons for EM

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Image from DALL-E.Subscribe nowSince my last note, we’ve seen significant developments across the macro landscape. The Fed kicked off its easing cycle in September with an aggressive 50bps cut, which prompted the market to price in a further 75bps over the next two meetings, alongside more than 100bps for 2025. At the same time, US data surprises have been steadily climbing since July, with inflation surprises moving sideways - anointing the more constructive view on the disinflation process. Meanwhile, in China, the government has announced a raft of stimulus measures. In this note I’m going to discuss the following:Recent moves in EMFXWhere we stand in my frameworkChina stimulus.FX Carry - opportunities and challenges.Brazil - if not now then when?External vs fiscal - still diverging.Recent moves in EMFXLet’s look once more at how EM FX has moved on a NEER basis—stripping out some of the USD move. Here, you can see some outsized moves from the low-yielders, notably MYR and THB. The magnitude of these moves took me by surprise. It’s clear that a substantial carry trade had built up across a range of economic agents throughout the US hiking cycle. The unwind was violent, with expectations of a reversal of USD hoarding by local corporates in Asia triggering heavily skewed demand. The big winner outside Asia has been ZAR, with lower US rates dovetailing well with a more centrist approach emerging from the new coalition government in South Africa. Meanwhile, many higher-yielding EMs continue to suffer from local political noise and deteriorating fiscal expectations, including …