EM FX: Outlook remains positive - TDS

Analysts at TDS note that since September, EM FX has weakened significantly against the US dollar and suggest that this move does not appear to be a classic ‘risk-off’ move as EM equities have continued their strong performance.

Key Quotes

“Instead, this mostly reflects positioning, in our view. We think the outlook for EM FX remains positive and current weakness is a good buying opportunity.”

“In 2017, we have continued to observe a reduction in EM capital outflows, especially out of China. Indeed, 2017 is on course to achieve breakeven for the first time since 2013. This comes as capital inflows from non-resident EM investors have increased to over one trillion dollars this year.”

“Stabilization of the Chinese economic situation is key to the improvement of the global and EM outlook. As the economy moves away from increasingly risky debt-fueled growth dynamics, increased renminbi flexibility and an effort to deleverage and regulate the financial system should advance.”

“Fed balance sheet reduction and EUR strength are risks that EM investors should neither neglect nor overstate. When EM growth is on the rise, as it is now, the drag from factors such as these should be diminished. Volatility induced by changes in market-implied Fed expectations is an opportunity. We remain positive on EM FX and rates overall, but acknowledge that performance against the EUR could be challenging.”