EM FX: What is attractive and what is not? - TDS

Cristian Maggio, head of emerging markets strategy at TD Securities, suggests that the EM FX offers short-term opportunities to exploit the implications of a likely more supportive risk environment in the coming 1-3 months.

Key Quotes

“High carry, high beta and high correlation currencies are likely to be the top beneficiaries in this context. Extra support is likely to come from undervalued stock valuations.”

“YTD total return of EM FX vs USD has been largely driven by spot return. In a few cases (ARS and TRY) the very large carry has provided a significant impact, but currencies have not rallied as much as some of their less risky peers that provide the expectation for lower but less volatile returns. Many of the currencies that have posted the best YTD performance do stand out by either carry, beta or low valuation of their stock markets. Sometimes a combination of more factors is visible.”

“But if the better risk environment is here to stay for a while, we think that currencies that present a higher score by the mentioned metric may outperform their peers. Amongst them, we see the concrete possibility of strong performance by currencies that we are strategically bearish in the long term - these include TRY and MXN. We would, however, reiterate caution in picking high-carry and high-beta currencies for tactical longs as they tend to remain intrinsically volatile and subject to idiosyncratic risks that are only partly predictable.”