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We have been shifting our portfolio by rotating out of long positions in commodity currencies, preferring commodity importers. We believe risks are skewed for EMEA EM commodity currencies to underperform in the months ahead, after having outperformed year-to-date.
This has led us to rotate out of RUB into TRY in the GBI-EM Model Portfolio; eroding carry is likely to curb further RUB appreciation in an environment where oil prices are under downward pressure and policymakers are increasingly uneasy with RUB strength.
In outright trades, we hold long TRY/ZAR, with the ingredients for TRY outperformance against other EMEA EM high yielders in place in our view.
Our preferred TRY relative value expression is against ZAR, with rand valuations uncompelling at current levels given risks of further political noise in the months ahead and a pending Moody’s rating review, and headwinds from falling iron ore prices. In late March, we had moved ZAR to MW (from OW) in the GBI-EM Model Portfolio, as political tensions escalated.
We add short EM vol risk on positive developments this week, selling 1Y USDTRY vols after unexpected CBRT hawkishness, and -1M/+3M vega-neutral calendars in USDBRL to fade the mid-week vol uptick driven by local and NAFTA political noise.
Stay overweight FX in GBI-EM model portfolio, mainly via Latam. Country overnights are TRY, ARS, BRL, and COP.
