Strong Dollar vs. EM FX Carry

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Photo by Harold MendozaSubscribe now9th June 2023This week I discuss:Loss of soft USD support for EMFXUpdated ThemesUpdated EMFX performance including TWI performance.Highlights from the Global PMIsPIX system in BrazilTurkey UpdateAt the beginning of the year, we had a strong set of drivers for EM FX. Amongst those was the favourable relative trajectories of the EU, China and the US. We were nearing the end of the tightening cycle in the US, with growth in China and Europe expected to rebound strongly. As we stand today that constructive dynamic looks under threat from all 3 angles. Recent data out of China leaves concerns over the durability of the bounce observed in Q1, with similar concerns emanating out of the Euro Area. Following the end of the US debt ceiling charade, there is an active debate that any Fed pause could be short-lived, with patience potentially running thin over the sticky nature of core inflation and in the context of a robust labour market.The recent broad recovery of the USD is a response to these dynamics and with quantitative tightening on the horizon it’s difficult to bet against some continuation.Without a soft USD backdrop, EM FX trading is a relative game, and as I’ve been discussing all year there are some strong themes in that regard. Carry and ex-ante Real-Rates based themes have already delivered strong returns, with high-yielding Latam and CEEMEA currencies performing well, and low-yielding Asian currencies under pressure. My recent expression has been long MXN and BRL and short CNH. I’ve taken off most of these core positions in the near …