2022/23 convinced me that fairytales only happen when I trade emerging markets FX, other than the Lizzie/Rishi’s sterling bungee jump last September. But then Britain is now an EM for the first time since the Yorkist Edward IV defaulted on his loans to his Lombard bankers during the Wars of the Roses. I know EM FX also wins the gold medals in nightmares, as any investor in the Lebanese pound, the Turkish lira, the Pakistani rupee, Russian ruble, South African rand and Nigerian naira will tearfully attest. Yet the trick is to embrace the good, hedge the bad and avoid the ugly in the EM FX Premier League and ensure that Dirty Harry never sends his angelic (Ferishta) boys to offer you a software update.
I have raved ad infinitum about the Mexican peso (MXN) as my fav FX play in EM since mid-2022. I hope you nibbled on this delicious Burrito Grande. The Mexican peso is up 16% against the USD in 2023 due to the best carry/vol metrics in the Milky Way and the friendshoring boom/FDI bonanza south of the Rio Grande, a spike in exports to and remittances from Gringolandia and the Hacienda’s yummy 7.5% policy rate. I would book profits at MXN 16.80 and on the Borsa tracker EWW now as rate cuts are inevitable and rotate into any of the top listed Mexican banks, Telmex and Televisa. The Colombian peso did even better than Mexico with a 17% pop. The señoritas in Kali are the hottest in the world but sadly the séniors in Kali are also the most dangerous hombres in the world. Demasiado!
BOJ Governor Kazuo Ueda did a hawkish tweak on YCC and EM FX had a mini heart attack. But if inflation remains above 3% in Dai Nippon, even a twerk on YCC will trigger cardiac arrest in this asset class. So, this is a time to pivot to fear and reduce greed in high beta EM FX wunderkinds. After all, Mrs. Watanabe and Japanese life insurance companies are at the epicentre of the biggest carry trade in global finance. So, when Tokyo sneezes, the global EM banking village catches the Black Death. Higher JGB yields and a stronger yen are the kiss of death for high yield carry currencies, as this will trigger the mother of all unwinding/repatriation trades in the global debt markets. This did not happen on Friday as Ueda-san’s tweak was too wishy-washy, but D-Day is coming and as UB-40 advised us all those years ago – wise men sing, only fools rush in and I can’t help falling out of love with you. Ma cheri, habibti EM FX.
Mark my words the lowest risk-free money market rate in the world is in Tokyo and Japan’s Mum and Pop have untold billions squirreled away in yen funded hara-kiri leveraged accounts invested in Third World currency excreta as varied as the SA rand, the Magyar forint, the Polish zloty and the Hermit Kingdom won. When the music finally stops in Tokyo, a financial neutron bomb will explode across EM FX. US Q2 GDP means a 6% Fed Funds rate and a 4.8% UST 10 Yield. This is not a pretty scenario for EM FX on the eve of a major local rate cut cycle. Caveat emptor!
