J.P. Morgan Updated EM FX Views

The US bank updates its views on broader EM FX. It remains market weight overall, focusing on attractive carry/valuations plays. See below for more details.

J.P. Morgan: "Trading a strong global macro trend for EM FX does not look like a great risk/reward strategy to us at the current juncture. First, there still remains a degree of ‘observational equivalence’ in the US and global data: on the one hand there is still a tight US labor market which can generate sticky inflation, with few signs of corporate or household imbalances, so rates may stay high-for-long. On the other hand, growth looks to be slowing with our economists forecasting this to continue in 2H24 and the cumulative impact of rate hikes may still be lagging through the economy. EM assets have become tired of trading these macro variations, as each scenario has looked plausible over the last two years. The bar for further Fed hikes is currently high but the rates landscape may again change post-US election. This brings us to the second issue for EM markets, which is a US election cycle in which some of the policy proposals may significantly impact specific EM countries. Given a lack of risk-premia in EM assets ahead of this, there is an element of complacency. On the positive side of the ledger, we still think EM has good idiosyncratic carry. Harvesting this idiosyncratic carry while remaining hedged against market beta is how we are currently recommending to position within EM.

We remain MW overall as EM FX will likely be held back in 2H24 by the looming US elections, while macro uncertainties remain unresolved. Within an overall MW stance, we favor idosyncratic carry stories and currencies with attractive valuations.
EMEA EM: We remain OW EMEA EM FX via OW TRY and RON vs. UW CZK. We position for a potential regional cyclical uplift via 2-month 1x1 389/381 EURHUF put spreads, hedge SA political risks via 1-month 19.50/20.30 USDZAR call spreads and have a medium term 3.40 USDILS digital put.
LatAm: We are OW LatAm FX via MXN, BRL, PEN and UYU. We are MW CLP and COP in the Model Portfolio.
EM Asia: We remain UW EM Asia FX, particularly low-yielding trade-reliant currencies, despite the recent squeeze. UW CNY and THB in the GBI-EM portfolio. Hold long SGD NEER vs low-yielding proxy basket."