EM FX: INR and IDR most attractive – RBC CM

Analysts at RBC Capital Markets find INR and IDR to be the most attractive EM FX, even if liquidity conditions were to deteriorate, given their relatively high levels of risk adjusted rates and high growth expectations

Key Quotes

“Throughout the first half of 2017, carry was a major theme in EM; however, given the recent turn in the ultradovish rhetoric from DM central banks, we look at which EM economies would be more vulnerable if liquidity were to deteriorate and how this would impact currency selection going forward.”

“In order to assess relative value in EM FX, we calculate a risk-adjusted rate by stripping out the credit risk and inflation risk from the 5y sovereign yields and compare it to the fundamental characteristics present in each EM economy.”

“Based on our analysis, we find that INR and IDR appear the most attractive given their relatively high levels of riskadjusted rates and high growth expectations. Meanwhile, BRL and ZAR rank at the bottom of the spectrum based on their weak fundamentals while TRY appears overvalued given that it has the lowest risk-adjusted rate.”