EM FX Carry Trade Update November 18, 2019

Carry Trade Short Term Performance
The shorter-term performance of EM currencies was mostly down to the prior month, with some of the Asian exporters possibly bid due to China moving the USDCNY below 7.00 – note solid performance in the CNY (CNH) itself and similar performance in IDR, MYR, KRW. But South America has been socked with ugly losses, concentrated in a wild swing in the Chilean peso after social unrest recently broke out, but now Colombia’s peso now embroiled in a similar situation as a nationwide strike has been called for November 21.

A snapshot of specific EM credit spreads
We flashed the chart below the last time around (though this time we add the Chile and Russia charts at bottom), noting the recent back-up in South Africa’s credit spreads on the news of the ESKOM bailout effects on the nation’s budget deficit. Alas, one of the bond rating agencies’ decision not to downgrade South Africa’s sovereign bonds to junk may have saved the credit spread for now and ZAR has remained rather stable. Elsewhere, however, note how many currencies are “underperforming” the positive developments in individual spreads. This could be either a sign of an unrecognized opportunity, a sign that investors are waiting for more supportive signals from the US dollar turning lower, or a warning that EM’s are having a tough time catching a bid in a supportive environment and that policy cuts across EM are wearing on investors’ interesting in the sector. Note that the massive spike lower in CLP has in no way affected the country’s credit spread thus far – and we have seen a considerable bounce-back in the CLP from its weakest levels.

Carry trade performance*
Among the funding currencies, the sterling resurgence suggests carry traders should steer clear of funding in sterling if the path to a smooth Brexit remains clear through the December 12 UK election. Elsewhere, the USD has more than held its own against the other negative yielding funding currencies over the last month – especially versus the Euro. 

As for EM Currency performance, the Turkish lira has been a darling , while elsewhere the performance has been more mixed, to say the least.

Current carry available*
The chart below simply shows the forward carry for owning the USD versus funding currencies and the returns on higher yielding EM currencies versus the US dollar. We have discussed in recent weeks how increasingly little carry is available as many EM central banks have taken advantage of generous financial conditions and low inflation to slash rates. Interesting to note that the two very weak performers in EM of late, COP and CLP, are in countries with some of the lowest policy rates across EM, suggesting little room for error when problems do arise.