FxWirePro: Snippets of optimized hedging portfolios among EMEA FX

The speed of the correction in EM FX has surprised us, but we remain cautiously pro-carry in our region, given supportive valuations.

Over the past two weeks, EM FX weakened sharply across the board (refer above diagram). This was driven mainly by repricing of US yields and a stronger dollar. Yet, we believe stretched FX positioning likely contributed to the sell-off (refer above diagram).

We took a more cautious stance already in our EMEA EM Local Markets Compass on September 8, where we added UW RON as a hedge to EURUSD moves.

We subsequently also added UW ZAR on September 14. While we keep these two hedges in place, our overall portfolio remains net pro-carry via OW TRY and OW RUB. With EM fundamentals improving and the correction over the past two weeks taking most of the currencies in our space cheap on short-term and long-term valuation metrics, we believe net pro-carry bias remains the right strategy in our region.

As per JP Morgan’s recommendation, the long positions are continued in TRYZAR cash trade and are OW TRY in the GBI-EM model portfolio. The main challenge to our long TRY exposure has been a relatively heavy FX positioning. For instance, the JP Morgan Local Markets Client Survey showed a 3.6 score as of September 21.

However, with the recent sell-off in lira and concerns over Kurdistan weighing on the currency, we believe the positioning is much cleaner now. Meanwhile, lira’s high yield continues to offer an adequate reward for the macroeconomic and political risks facing the country, in our view, in sharp contrast to South Africa.