FxWirePro: Fair interpretations and intricacies of hedging drivers of EMEA EMFX

EMEA EM FX: We remain MW overall, and add a short ZAR outright trade. We encourage MW in the JPM’s GBI-EM Model Portfolio with an OW in RUB hedged against UW in ZAR and OW in PLN and CZK hedged against UW in RON.

While the appointment of Jerome Powell as Fed Chair is more supportive of markets than some of the other names speculated would have been, plenty of risks remain for EM FX, in our view.

US and Euro area data surprise indices have pushed substantially higher, which should support rates expectations, and US tax reform is likely to linger as an upside USD risk for some time. Positioning in EM FX remains very high as evidenced in J.P.Morgan's Local Markets Client Survey.

Outflows have now commenced both from local bond funds, as well as equity funds and these could extend for some time. As such, we prefer to stay cautious.

We recommend going short ZAR in cash vs. an equally weighted basket of EUR and USD (target 16.10, review 15.00, spot ref. 16.4380). We already hold a UW ZAR position, but we use the retracement in USDZAR lower since the initial reaction to the MTBPS to enter also an outright trade. We express the short vs a basket of EUR and USD given our relatively low conviction on the near-term direction of EURUSD. We believe current ZAR levels reflect complacency in the face of imminent sovereign rating downgrades.