Citi Remain Optimistic For EMFX, Despite Rising UST Yields

Citi acknowledge danger for EMFX amid rising UST Yields but remain positive.

Strategists highlight three key factors mitigating the risk:

• Further US Dollar weakness should be expected as markets anticipate the Fed to monetise the additional Treasury supply.
• The recent surge in yields was more driven by break-evens than real rates and should therefore have less impact on emerging market currencies.
• Rate volatility, which has actually been falling, remains a bigger driver for EMFX.

The note adds that caution should be taken regarding some EM currencies amid positioning and overbought conditions which may prompt a degree of consolidation. Risks from new Covid strains and vaccination logistics are developing, however, they do not propose this as a game changer.

In the LatAm space, they remain long COP and PEN, while in Asia it favours CNH, IDR, THB and INR. In CEEMEA, it has a ZAR put spread and is long EURPLN and EURHUF.