12 Feb 2016
A growing problem for EM currencies – SocGen
Research Team at Societe Generale, suggests that the EM growth cycle, both in absolute terms and relative to G10, matters immensely for emerging market currencies.
Key Quotes
“Growth cycles map closely with the pattern in net capital flows and currency performance. Capital continues to flow out of emerging markets, most notably from equities, which is pressuring EM currencies. There is no end in sight for these dynamics reversing, especially as the EM growth picture and the EM-G10 growth differential show no signs of reversing course. Rather than stepping in front of a well established trend, we prefer to wait until an identifiable catalyst surfaces to buy into EM currencies on a medium term investment horizon.
FX: EMEA currencies had a mixed week, with RUB selling off on oil weakness, while RON, HUF and TRY held quite well; we continue to favour low beta currencies in this environment. In LatAm, the MXN continues to be under pressure and we got stopped out of our short USD/MXN trade; we would tend to be sellers of LatAm currencies. In Asia, remain sellers of MYR, IDR and KRW.
Fixed Income: In EMEA, we would be receiver of RON, CZK, HUF and ILS rates. In LatAm, we would still be receiver of MXN rate, and in Asia, we favour receiving THB and KRW. In sovereign credit, we upgrade Mexico to slightly overweight: as oil is stabilising to $30-$35bbl, we think that Mexico should pair back part of its losses. We also downgrade Hungary to slightly underweight (from slightly overweight), on less attractive valuations.”
Key Quotes
“Growth cycles map closely with the pattern in net capital flows and currency performance. Capital continues to flow out of emerging markets, most notably from equities, which is pressuring EM currencies. There is no end in sight for these dynamics reversing, especially as the EM growth picture and the EM-G10 growth differential show no signs of reversing course. Rather than stepping in front of a well established trend, we prefer to wait until an identifiable catalyst surfaces to buy into EM currencies on a medium term investment horizon.
FX: EMEA currencies had a mixed week, with RUB selling off on oil weakness, while RON, HUF and TRY held quite well; we continue to favour low beta currencies in this environment. In LatAm, the MXN continues to be under pressure and we got stopped out of our short USD/MXN trade; we would tend to be sellers of LatAm currencies. In Asia, remain sellers of MYR, IDR and KRW.
Fixed Income: In EMEA, we would be receiver of RON, CZK, HUF and ILS rates. In LatAm, we would still be receiver of MXN rate, and in Asia, we favour receiving THB and KRW. In sovereign credit, we upgrade Mexico to slightly overweight: as oil is stabilising to $30-$35bbl, we think that Mexico should pair back part of its losses. We also downgrade Hungary to slightly underweight (from slightly overweight), on less attractive valuations.”