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Goldman Sachs Say Stay Selective On EM FX

EMERGING MARKETS
  • Over most of the past two years, as both EM and G9 currencies have struggled versus the Dollar, EM FX has outperformed G9 FX on a total return basis. And, EM FX outperformance has continued even through wobbles in risk sentiment, and further volatility in global real rates.
  • Some of this EM FX outperformance can be justified: in general, EM hiking cycles have run ahead of and more aggressively than many DM jurisdictions, and inflation surprises in EM have become more two-sided on a combination of a more-favourable oil and currency impulse.
  • Even so, one corollary of the EM resilience at the end of Q3 is that the relative risk-reward for EM assets in Q4 may be somewhat more limited, especially for pro-cyclical parts of the EM asset complex that are more vulnerable to downside shocks.
  • For EM FX in particular, we reiterate our view that investors should emphasize relative value expressions that take advantage of selected EM shorts, such as our recommendation to stay long BRL/ZAR, where we have tightened stops to protect gains, or our recommendations to stay long SGD vs TWD or long IDR vs PHP, where crosses have ground stronger YTD against a challenging backdrop.
  • Over longer horizons, many of our USD/EM forecasts feature eventual downside; over shorter horizons, however, this week’s price action has shown that the Dollar remains a hard bar to beat given the combination of resilient US growth and hefty Fed hikes.
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