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Goldman Sachs: Still A Better Backdrop Despite Recent Rate Selloff

EM FX
  • When zooming out from the last couple of sessions, Goldman Sachs’ preferred EM carry basket expression (long MXN, BRL & HUF vs EUR) has been relatively resilient to the February bout of USD strength and the selloff in core rates, in large part because these were accompanied by better US activity data.
  • While there are likely to be similar bouts of increased focus on interest rate shocks from central banks, GS have argued that this 2022 “1-factor model” is not necessarily the best playbook for EM FX in 2023. Instead, they think a view on EM FX will depend also on global growth as it moves back into the co-pilot's seat, such that FX sensitivities to both US rates and pro-cyclical impulses will be important to keep in mind.
  • Therefore, with their above consensus view on US growth, China’s pivot to a pro-growth stance and the improvements in European growth, Goldman think the macro environment is still a friendly one for EM carry trades, where a ‘basket trade’ with non-USD funding can help absorb the different sensitivities of each currency to growth and rates shocks.
  • In particular, GS think MXN and BRL remain the right longs for a longer US cycle given comprehensive links to US demand and also their relatively lower sensitivity to US rate moves.
  • In the case of BRL, while the Real has so far underperformed given the back-and-forth between fiscal and monetary policymakers in Brazil, the news flow over the last week suggests that, at least for now, the probability of a true left-tail scenario has declined.
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