BNY’s EMEA Macro Strategist Geoff Yu argues that tighter global financial conditions and peaking risk appetite are challenging EM FX carry trades. High-yielding and Latin American currencies face outflows as holdings remain elevated, while EM allocations are still low in global portfolios. The bank stresses that US-led financial conditions and fading Fed easing expectations may cap further EM support.

Carry trades and EM FX at risk

"Meanwhile, FX carry trades have also peaked in holdings terms and on balance, high-yielding currencies are also facing their fair share of outflows."

"Latin American currencies are particularly exposed in this respect due to elevated holdings, meaning more politically painful hikes are likely essential to help avoid any form of disruptive unwinding."

"However, low weightings, comparatively more attractive multiples, and favorable exchange rates, especially in APAC, will likely support sustained improvement in allocations."

"The biggest test remains U.S.-led financial conditions adjustments."

"The most supportive element for EM – Fed easing expectations – may be approaching its limits in the face of any turn in U.S. data."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)