EM FX Carry Trade Update September 23 2019

Emerging market carry trades performed poorly over the last week, even as general risk conditions have remained quite supportive. But the news stream of the last week has proven fairly negative for EM FX on a zany roller coaster ride in global oil markets in the wake of the attacks on key Saudi production facilities, an FOMC meeting that proved less dovish than expected and supported the US dollar, and even unwelcome developments on the US-China trade talk front, as Trump expressed a lack of interest in any "partial deal" shortly after the Chinese delegation announced a cancellation of plans to visit Montana and Nebraska next month. Still, the remarkable thing here, as noted in our global risk indicator chart below, is that risk sentiment remains extremely elevated, with no signs of strain despite the above.

Chart: Saxo Bank Global Risk Indicator
Our global risk indicator remains solidly in the green, though the recent spike in improvement has backtracked slightly. From these levels, risk for carry trades can come from any direction: namely, further strength in the US dollar if the market feels that the Fed is behind the curve in cutting rates and/or is not yet on top of USD funding pressure, confidence in the global growth outlook worsens, and finally, if the US-China trade negotiations lead nowhere next month.