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EM FX: Goldman Sachs Expect Carry Trade Unwinds to Reverse Slowly

EM FX
  • Goldman Sachs write that what started as country-specific market moves in response to election results (in South Africa, Mexico and India) became a broader EM currency sell-off through the month of June and an EM FX carry drawdown, even though the backdrop has actually been supportive for high-carry currencies.
  • A strong payrolls report reduces recession risk, and the CPI and PPI releases for May keep cuts on the table. Such an environment should keep equities well-supported and rates and the dollar rangebound – allowing EM FX carry to perform well – and suggest that the recent unwind should ultimately reverse.
  • However, they note that full recoveries in will require a degree of patience and the ability to withstand higher volatility. Goldman Sachs find analogous drawdowns to this episode have taken around a month to bottom out on average.
  • This may be the case especially in the current episode given ongoing political headlines in Mexico, Brazil and South Africa, and the upcoming first presidential debate in the US.
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