We reiterate our bullish view on EMFX, and mark-to-market our forecasts to preserve outperformance relative to the forwards and consensus. In our Year Ahead Outlook, we projected that the bottom in EM FX would be in Q1. We have turned progressively more bullish through the year, culminating in our current thesis of "In carry we trust". In this update, we remain believers.

High yielders to continue to outperform on a total return basis through to year end. We selectively favour high yielders such as MXN, BRL, ZAR, TRY, INR (we have a less positive assessment on RUB and IDR in the high yield space), and would use the proceeds from carry trades to fund long dollar risk against low yielders such as KRW and TWD where price action is looking fatigued. These latter currencies would also be the most sensitive to future shifts in China or US growth expectations.

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 scopes to increase allocations. Positioning and allocation to EM assets have plenty of scopes 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.

For now, our preferred high yielding currency in EMEA EM remains to TRY given the high carry on offer. In the case of RUB, we think structurally supportive currency factors (current account surplus, high real yields, and reasonable valuations) will re-assert themselves post summer seasonal weakness in the currency, which underpins our bias to eventually turn OW.

Among LatAm FX pool, UW MXN would be reduced, hold OW BRL and CLP to stay neutral FX overall: The uneven commodity price action suggests idiosyncratic opportunities for the region. We reinforce our bullish CLP view as the peso lagged the copper rally and is now screening cheap in our short-term valuation models.

We are bullish the BRL, with positions still not too crowded and the iron-ore surge helping the terms of trade, and we take a loss in our ARS OWs as the currency continues under pressure given political uncertainty which may linger. In Mexico, we revise our peso forecast stronger and partially reduce MXN shorts.