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Investors remain neutral EMFX on aggregate in the September’s EM Client Survey of JPM. The aggregate EMFX positioning measure remains close to neutral and at the lowest levels since September 2018 (refer above chart).
While the investors continue to add FX hedges to OW rates positions with overall EMEA EM exposure being FX-hedged for the first time since December 2016.
Focusing on three regions:
1) the notable FX reductions were concentrated in EMEA EM,
2) investors reversed last month’s risk reductions in trade-related EM Asia currencies, and
3) had marginal increases across Latam FX.
Investors are FX-hedged in the EMEA EM region as a whole for the first time since December 2016. In CEE, investors halved OW CZK positions and reduced OW PLN as well. In the high yielders, investors moved UW ZAR (from OW) following the largest monthly reduction in the
Survey and marginally extended OW RUB positions. This is notable considering that our South Africa rates positioning score is the 4thlargest overweight across liquid EM.
As a result of these FX risk reductions in EMEA EM, our hedge ratio (overall EMEA EM rates score minus overall EMEA EM FX score) indicates that investors are FX-hedged in the EMEA EM region as a whole for the first time since December 2016.
We hold onto an UW via low yielding CEE (HUF and CZK).
In high yielders, a relative value approach has been adopted with an OW in RUB to balance our UW in ZAR. A new long in EURRON 6M forward is also added.
We recommend going long EURRON 6m forwards with a target of 4.95 and review at 4.79 (entry 4.8337). We recently turned MW (from OW) RON in the GBI-EM model portfolio, citing the increasing risks from Romania’s large twin deficits.
We now also add an outright bearish trade. Prospects of a sharp growth slowdown could be the trigger for the central bank to allow more RON spot depreciation, in our view. While carry is high compared to the region, at 3% for 6-months, it is still a relatively attractive entry point compared to the levels traded in Q1 and we would expect at least partially gains on our trade recommendation to arise from re-widening in the forward points. Courtesy: JPM
