Summer vibes are here, with risk appetite remaining strong and supporting high-beta currencies in the short term. However, our directional models continue to suggest large USD positions, which should keep exerting pressure on EMFX over the medium term. BRL and ZAR are our preferred shorts.
Our directional models remain firmly long USD, with risk appetite improving (Exhibit 1). While FX sentiment remains only marginally long USD, our equity-driven momentum and PMI models suggest to keep sizeable long USD positions over the medium term. For the week ahead, our models suggest that high-beta currencies should do ok but purely from a risk appetite perspective as both our RSM and centrality models improved over the past week (Exhibit 3).
BRL and ZAR are preferred shorts: BRL is now a preferred short position as the equity factor turned negative alongside terms of trade, momentum and value. Most of the deterioration seems to come from the perception that fiscal slippage remains as a large risk. Second to BRL comes ZAR as not only did ToT move to underweight, but it is now also one of the currencies with the highest correlation to commodities (which increases the weight of the signal; see here and Exhibit 2).
COP and CLP improved the most on the back of ToT: The former was additionally aided by VRP moving to long, potentially helped by the larger potential USD supply coming out of the public sector selling. Yet, the models remains quite neutral on both, although a bit more negative on CLP (Exhibit 2). In line with COP ToT improvement, RUB was upgraded to neutral.
