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The big bad imbalance: EM FX vs. US dollar positioning
02 April 2014
Investors are rightly taking a fresh look at adding Emerging Markets (EM) exposure after nearly
a 12 month EM bear market. Technicals are better, valuations attractive, and EM has shown
fundamental resilience in the face of shrill media pessimism and two ‘taper-tantrum’ related outflows.
Still, one thing holds back many potential investors from putting money to work in EM, namely the fear of currency
volatility. That EM FX is volatile should surprise no one, but are investors really right to fear it to the extent that they
avoid investing entirely?
We think not. In fact, we think the fear of EM FX volatility is both irrational and dangerous. EM FX volatility is lower
than EURUSD volatility and returns are greater.
More importantly, the fear of EM FX volatility is contributing to big imbalances in global currency positioning in
favour of the Dollar and against EM currencies at a time when strong macroeconomic forces suggest investors
should position the other way around.
The best way for investors to protect the purchasing power of their assets and to ensure against the impending fall
in the Dollar is to exploit the current (extreme in our view) pessimism about EM FX to reduce their exposure to