BNY’s EMEA Macro Strategist Geoff Yu notes that Emerging Market FX carry trades remain resilient despite the Middle East conflict, with only INR and RON now underheld among 12 high-yielders. He highlights real rates and credible EM central banks as key supports, alongside potential Fed pushback on rate cuts. TRY stands out for fiscal concerns, while IDR risks joining the underheld group.

Real rates underpin EM carry resilience

"Of the 12 Emerging Market (EM) currencies that we characterize as high-yielding – and for which we have sufficient data density – only INR and RON have moved into underheld territory based on the latest available data."

"The single most important factor behind FX carry resilience, in our view, is real rates. Inflation is now expected to rise globally, but EM central banks have generally established sufficient policy credibility in recent years such that few are expected to ease policy aggressively into a supply shock, even if growth faces significant challenges in the near term."

"A further constraint is the potential pushback on Fed rate cuts. Bank Indonesia’s decision on Tuesday illustrates the point: IDR is currently most at risk of joining INR and RON in underheld territory. The bank framed its decision around “strengthening external resilience,” with “stabilization of the exchange rate” through intervention and “attract[ing] foreign portfolio investment” as key policy anchors."

"Markets are likely to expect most EM central banks to follow this path, which explains why most high-yielders remain net bought."

"TRY is currently facing the strongest selling pressure, even with very high nominal rates, suggesting growing concern on the fiscal front – particularly if subsidies become increasingly burdensome as the conflict continues. We expect central banks to signal to fiscal authorities that market tolerance for large-scale energy price intervention is extremely limited, goes some way to explaining why austerity or rationing measures are prevalent across emerging and frontier economies."

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