EM FX: Tantrum redux - SocGen

Jason Daw, Research Analyst at Societe Generale, suggests that EM currencies are entering a higher volatility regime with heightened depreciation pressures through to 1Q 2017. 

Key Quotes

“A Trump presidency raises the protectionist risk premium and higher US yields are disruptive for the fragile equilibrium in emerging markets. After a painful sell-off through to the end of 1Q, opportunities should arise to enter bullish EM positions. However, elevated risk premium means that the terminal value for EM FX is weaker than current spot rates. Through to 1Q 2017, our bias will be to opportunistically add bullish dollar risk. However, this will not preclude tactical opportunities to short dollars when positioning, sentiment, or technicals are stretched.” 

“Investors with a long-term horizon are advised to wait until further depreciation offers attractive entry points for bullish EM exposure. Through to 1Q, currencies sensitive to Trump’s policies and to deterioration in risk sentiment are expected to underperform (MXN, BRL, ZAR, TRY, KRW, TWD, PHP) while those that are more insulated (INR, IDR, THB, RUB, CLP) should outperform. Selective carry strategies may be appropriate. Regionally, EMEA (USD crosses) and LATAM will suffer at the expense of Asia to 1Q, but the reverse is likely as the year progresses.”  

“CNY depreciation will remain intact, reaching 7.30 by end-2017. The probability of a free float in 2017 is 20% but 50% if the US undertakes trade actions against China. Irrespective of US policies, the probability rises significantly over time – we assign a 50% chance of a free float by the end of 2018 and 80% by the end of 2019.”