Emerging Markets FX: EM FX: Reducing risk and adding hedges

Research evidence excerpt

Emerging Markets FX: EM FX: Reducing risk and adding hedges

enewed Iran tensions). Month-to-date, Brent crude

RV in June following RBI’s bazooka of capital inflow

oil prices are 35% higher and through $100/bbl, while TTF

attracting measures. The initial bout of optimism around

gas prices are 43% higher and have surpassed the previous

their ability to favorably alter domestic corporate hedging

peak (Figure 1OilandgaspricesaresharplyhigheroverJuly,andrisksofelevatedpricesremaininthenearterm). With the Strait of Hormuz tanker vessel

behavior to the rupee’s benefit has given way to a more

crossings grinding to a halt and limited signs of geopolitical

sobering reality of renewed USD demand this month as

resolution, the specter of a further rise in energy prices lingers

oil prices have surged again, even as the relentless FII

for EM markets (see Oil Markets Weekly). We believe this

equity outflows of H1 have paused for now. RBI’s some-

requires some portfolio adjustments and hedges in a volatile

what puzzling light-touch management of INR weakness

risk environment, even after the moves to date. However, we

over the past few weeks has also come as a surprise, at a

continue to hold our core OWs in higher carry and idiosyn-

time when BI and BSP’s stout FX firefighting have yield-

cratic stories which still leaves us OW overall.

ed fruit in terms of cooling depreciation pressures and re-

attracting some inflows. Nonetheless, we stay with the

In FX, we stay net OW, but cut some trades. Regionally,

trade on the view that the rapid pace of rupee weakness

this now leaves us OW LatAm, MW EMEA EM and UW EM

will invite stronger RBI intervention in short order than

Asia with the combined changes reducing our overall OW by

has been the case, and that sizeable backloaded FCNR(B)

half.