As we engage a pivotal juncture between DM rates approaching peak and China on the verge of descending into deflation, EM Macro is subject to converging pressures. It is essential to embrace the diversity in the EM space here.

I have been advocating throughout the early spring EM’s were ahead and would be the first rate-cutters in this cycle and the LatAm carry trade will likely take in water in the aftermath- while the rate cuts have largely aligned with my expectations (which preceded market pricing I might add), the punishment in the foreign exchange has been harsher and quicker than I anticipated.

The pain can largely be subscribed to the BoJ YCC decision and the subsequent steepening of the USD curve (more on that later). The coinciding with recent unwinding is apparent if one beholds the performance YTD:

Chart 1: Performance of LatAm currencies vs USD YTD