THE EM TRADER: Solid H1, Still All to Play For in H2

Research evidence excerpt

THE EM TRADER: Solid H1, Still All to Play For in H2

Goldman Sachs The EM Trader

the current macroeconomic backdrop, we think FX carry strategies can continue to

deliver positive total returns even if the Fed path reprices further, as long as risk

remains supported. However, the choice of funder becomes even more important in

this setup, with risks of a further US front-end repricing arguing for using

low-yielders such as EUR, CAD, CHF and JPY as funders. Within EM, ILS (high beta to

tech stocks, overvalued, BoI shifted in a more dovish direction), CLP (high beta to

copper prices and broader risk), and THB (structural economic challenges) are our

preferred funders that help neutralise different sets of risks to EM carry trades

without a decline in carry returns. On the long-side, terms of trade shifts have been

more favourable to energy importers since mid-May, including ZAR (that also

benefits from SARB hikes and continued fiscal outperformance), INR (where policy

measures have caused us to shift to a more constructive outlook and recommend

longs vs THB) and EGP (where we see scope for further appreciation supported by

foreign inflows). In LatAm, MXN’s sensitivity to US-specific cyclical pricing makes it

an attractive long in our view, whereas we think the setup has turned less supportive

for BRL performance due to rising political noise and a less clear central bank

messaging. Finally, we continue to favour the more idiosyncratic carry stories in COP

and HUF following their respective elections.

n EM Local Rates: Navigating the Fed and the Supply Side... Even as short-dated oil

has reverted to close to pre-war levels following the US-Iran agreement, EM local

and G10 front-end rates have been stickier, reflecting a transitory inflation bulge still