El Nino and EM Macro

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26th May 2023Subscribe nowThis week I discussOutlook, market movesMacro developmentsCentral banksMarket MonitorsEl Nino and EM MacroThis week’s ranges gave an opportunity for more active trading in EMFX. These moves served as a prompt for me to recognise a deteriorating sentiment towards EM risk. This shifts my bias regarding taking profits on strong moves. It seems unlikely that the cocktail of fears the market is grappling with will evaporate quickly (outside of the debt ceiling charade), and it makes sense to have the capacity to add risk in the moments when those fears cause adverse moves. With many EM FX themes having already performed so well on the year, it doesn’t feel like prices are going to run away from you if you sell strength. I haven’t done enough of this recently, so when USDMXN, for example, went against me this week, selling into the bounce was a more lively experience than it could have been. I end the week still with the same core positions, but have tactically added more USDMXN short and have reduced the USDCNH long after what I see as an outsized move.While investors are being distracted by the debt ceiling charade, the more medium-term risk profile has been shifting. The pendulum that swings between US recession fears and fears over the pace of disinflation has been moving towards the latter. Perhaps my anticipation of what the BoE will likely do to my borrowing costs here in the UK is leading me to exaggerate the risks, but it certainly seems that the risks around the Fed are shifting. This process has impacted EM FX but is yet to have a dramatic eff…