Still believers in the EM FX carry trade - SocGen

Analysts at Societe Generale are reiterating their bullish view on EM FX, and mark-to-market our forecasts to preserve outperformance relative to the forwards and consensus.

Key Quotes

“We projected that the bottom in EM FX would be in Q1. We have turned progressively more bullish through the year.” 

“We shift the strongest point in the EM FX cycle to Q4 from Q3, and also selectively revise some of our near-term country forecasts stronger. Supportive factors in the near term include a very slow Fed tightening cycle, a longer period of stability in Chinese growth, falling volatility, and solid EM fundamentals (growth momentum, external positions, and real yields).” 

“Speculative positioning seems neutral, and asset managers have plenty of scope to increase allocations. Positioning and allocation to EM assets have plenty of scope to increase. There remains a residual belief among market participants, which is slowly eroding, that the USD-bullish cycle is not over and that FOMC policy is a recipe for capital flow disruptions.”

“The biggest risk to a turn in EM sentiment is through the growth channel, not developed market policies, as long as fundamentals remain cooperative. The 2004-2008 Fed tightening cycle showed that EM currencies can flourish; this is being repeated in the current cycle. Until a meaningful catalyst emerges, we favour stronger currencies and buying into developed market policy-induced sell-offs.”