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Goldman Sachs Says EM FX Recovery Requires Relief From US Yield Curve

EM FX
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  • Goldman Sachs note that most EM FX are weaker vs. USD since the release of the March US CPI data, as US yields have risen rapidly due to a reassessment of the Fed rate outlook. Against this backdrop, high-carry currencies (especially MXN and COP) have underperformed, while currencies that had already underperformed in Q1, including EM Asia FX and CLP have performed better.
  • With this mind, GS think a recovery of EM currencies will require some relief from the US yield curve or that higher yields are driven more by growth than inflation. Also, the response of EM central banks to the repricing of local rates will be important, with GS citing the surprise BI rate hike and slowdown in the pace of easing in Hungary as examples.
  • GS think that the BoK, CBC and BOT will be more tolerant of a weaker currency than BI. In CEE, they think the CNB is likely to continue with the current pace of easing, especially as the ECB is a stronger anchor than the Fed, keeping CZK in the funder camp. In contrast, Banxico should be the most attune to Fed pricing, which will keep the carry buffer in MXN elevated.
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  • Goldman Sachs note that most EM FX are weaker vs. USD since the release of the March US CPI data, as US yields have risen rapidly due to a reassessment of the Fed rate outlook. Against this backdrop, high-carry currencies (especially MXN and COP) have underperformed, while currencies that had already underperformed in Q1, including EM Asia FX and CLP have performed better.
  • With this mind, GS think a recovery of EM currencies will require some relief from the US yield curve or that higher yields are driven more by growth than inflation. Also, the response of EM central banks to the repricing of local rates will be important, with GS citing the surprise BI rate hike and slowdown in the pace of easing in Hungary as examples.
  • GS think that the BoK, CBC and BOT will be more tolerant of a weaker currency than BI. In CEE, they think the CNB is likely to continue with the current pace of easing, especially as the ECB is a stronger anchor than the Fed, keeping CZK in the funder camp. In contrast, Banxico should be the most attune to Fed pricing, which will keep the carry buffer in MXN elevated.