EM FX: Turning more cautious in the face of crosswinds – Deutsche Bank

In view of the analysts at Deutsche Bank, over the past few weeks, US rates have moved higher while commodities prices (and thus inflation breakevens) have declined which is a negative combination for EM FX, particularly as it means US real rates have drifted higher.

Key Quotes

“EM FX has depreciated over this period, given its sensitivity to real rates. However, it is not clear whether this negative dynamic will continue. Commodities prices have stabilized at the bottom of the range, rather than broken it convincingly, while real rates still remain well below the levels observed in March and December.”

“Additionally, global growth remains robust and volatility is suppressed, both of which are positive for EM FX. Therefore, the asset class is facing significant crosswinds, with the near-term outlook not as clear as it was a few months ago. As a result of this, we turn more cautious and selective on EM FX, though not outright bearish.”