Goldman Sachs On EM FX & Election Outcomes

Goldman Sachs: "Election indigestion, but not all is re-direction. EM currencies have had a difficult week digesting the surprises in the election results across three major EM markets over the last week – South Africa, Mexico and India. The moves were led by the Mexican Peso, where risks of post-election policy changes appear more significant, with MXN moves spilling over to other carry longs, including even the more idiosyncratic Turkish Lira, as well as to the popular funder currencies (JPY, CHF). Taking stock of the moves since May 29th relative to shifts in other global macro markets, we find that MXN has underperformed the most followed by ZAR, whereas INR has performed roughly in line with what other market developments would imply. Additionally, a number of other EM currencies are weaker than ‘predicted’ by other market developments (including COP, HUF, PLN, BRL). All in all, we think that the post-election volatility in these currencies is likely to remain high until there is more clarity on government formation and policy programmes, with INR offering the most resilient carry proposition. For MXN, we think a reversal will be a longer and more volatile process than in its past positioning unwinds over the last couple of years, as uncertainty remains on the degree of potential constitutional reform. Outside of this, we think the unexplained underperformance in COP and PLN could reverse the most easily in absence of further hawkish US yield shocks, while for BRL we think the upcoming central bank meeting could have important FX implications."