Emerging Markets FX

Research evidence excerpt

Emerging Markets FX

t performance. This

with spot reserve inflows of $2.9bn after stripping out valua-coexistence of a relatively strong USD and gains in EM carry

tion effects of non-USD reserves (Figure 5EstimatedchangeinBI’sFXreserves). While the for-strategies is aligned with our findings in the analysis of previ-

ward book and FX loans data (due EOM) could offset someous carry cycles where we concluded that USD weakness is

of these gains, it marks a continuation of an improving flownot a necessary condition for carry performance (see “Latam

picture for the rupiah, with outflows peaking in Feb and eas-carry: now and then” section here). We are OW MXN.

ing since. FA outflows have been a key drag on the BOP, with

sentiment poor amongst locals and foreigners alike. TechnicalVolatility spikes are a risk to the view. Episodes when the

factors such as dividends and equity related outflows haveUSD strengthens against the DM while EM FX also performs

conspired to drive the IDR weaker in 1H, and remain a riskwell tend to occur in low-volatility environments. That

despite some moderation into 2H. Indonesia’s generousimplies volatility is a key risk and that if it rises significantly,

spending plans have been well known to investors for someit could undermine carry’s ability to generate positive returns.

time, however, with foreigners selling $6.3bn of IndoGBsIn the near term, idiosyncratic risk catalysts in Latam may

since 3Q25, once BI’s cutting cycle started looking mature.center on elections (for example, Brazil) and election results

Our client survey corroborates this shift, with investors(Colombia). More broadly, the main systemic threat to carry

reporting a Z-Score that has swung from +2.0 to -2.5z sinceis the prospect or delivery of aggressive Fed tightening, but