Most EM currencies continue to be net sold against the dollar, with the exception of RUB where option flows have flipped from significant selling to marginal buying. Selling in ILS continues at strong levels while selling in TRY has remained largely unchanged at modest level. In contrast, selling in ZAR has fallen considerably after significant selling seen over the last few weeks. The rest of the EM currencies have been net sold at modest levels
Deutsche – EM FX : EM Flows and Risk Sentiment: Outflows, but size still contained:
The EM Flow Indicator shows that outflows are emerging – the last two weekly prints have been negative (indicating outflows from EM). The last time there were two consecutive weekly outflow prints was in Dec 2016, thus this is a significant development. However, the size of outflows remains relatively contained, with the magnitude of the flow indicator nowhere near as stretched as in late 2016. Therefore, it is likely that the recent sharp EM FX depreciation has been driven more by FX hedging of EM assets held by foreign investors, rather than the outright selling of these assets (which would have triggered larger outflows). This remains the main risk for EM – the potential transition from FX hedging to outright outflows – but would require continued significant dollar strength and rising US yields. Over the coming weeks, the EM flow data will take on even greater importance, as it could provide a signal on whether we transition from phase 1 of the EM FX sell-off (FX hedging) to phase 2 (outright asset sales).