China; the end of an era leaves EMFX fragile

Treść źródłowa

25th August 2023Subscribe nowIn this note, I discuss:EM FX in a negative global backdrop, tactical longs onlyRecent macro developmentsBRICS conference – Opportunism, obfuscation, and opposition to the US.China – adjusting to a new normalMonitorsShareEM FX in a negative global backdrop, tactical longs onlyHigh rates in the US, and weak growth in China – this is the opposite of what an EM FX bull would cheer for. I’ve been tactically long since the sharp selloff early in the month, as I mentioned in my last note, but there isn’t a strong fundamental underpinning of a bullish view, and I hope not to be too greedy in picking my exit point. I am still long HUF and BRL. The former has been much more lucrative than the latter. As you will note from the monitors at the end of the piece, EMFX trends are broadly negative, and most currencies’ returns are being dictated by the same broad market driver.A recent bout of strength in the broad USD has been especially toxic for EM FX. Both the EUR and the USD have been relative outperformers of late, with volatility in EMFX and weakness in the lower-yielding Asian currencies, particularly the Japanese yen. Looking at the year as a whole so far, you can see the consistency of weakness of the manufacturing exporters in Asia. These have been excellent funding currencies. Despite recent weakness in CLP, the Latam bloc has been overwhelmingly the place to be invested, although a weak growth outlook in China undermines the investment case here too.With much pessimism about China surely priced in the short run, and having already seen a sizable r…