Equity Inflows Could Be Key For Further EM FX Strength

Broad US dollar weakness as part of the risk on trade continues to drive EM FX. Another part of the positive outlook for EM FX hinges on the recovery in equity inflows.

• With the key risk of the US election out of the way equity flows have resumed to emerging markets, this correlates with an 8-10% rise in emerging market equity indices during the period. Data from EPFR shows that in the week following the US election emerging market equities took in $6.5bn for their fifth highest inflow.
• The coronavirus crisis sparked a record flight out of emerging market assets, with more than $90bn leaving bonds and stocks in March alone, indicating there is still scope for further inflows.
• A recent fund manager survey from Bank of America showed investors are betting emerging markets will be among next year's winning asset classes, half of the interviewees indicated emerging markets as their favourite trade for 2021.