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EM Watch: Knock-outing the EM darlings, while inflation is returning in EM space

The current sell-off is driven by position squaring not least in USDJPY. The turning tide on USDJPY will impact the EM space largely and also knock-out a few EM darlings in commodity space!
2024-07-24


Welcome to our weekly EM editorial, where we touch upon the most tradeable topics in liquid EM markets and how they interact with main themes in G10 markets.


The overwhelming story centers around the position squaring party that has been triggered by the reversal of the carry trade in USDJPY. The real rate spread is no longer trending upwards, leaving the fair value lower than 150 now that the spec long positioning in USD versus JPY is getting squeezed.

We have admittedly been partially caught by surprise by the cross-asset position squaring that has been triggered by this and do at least partially blame USDJPY for the sell-off in Tech stocks, metals and related trades.

Chart 1: USDJPY still trading too high

The current sell-off is driven by position squaring not least in USDJPY. The turning tide on USDJPY will impact the EM space largely and also knock-out a few EM darlings in commodity space!

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