EMEA: CEE carry seen vulnerable as flows reverse – BNY

BNY’s EMEA Macro Strategist Geoff Yu highlights a sharp divergence between LatAm (Latin America) and EMEA (Europe, Middle East, and Africa) FX flows, with LatAm seeing six‑month high inflows while EMEA suffers its strongest selling in six months. The report warns that CEE (Central and Eastern Europe) and African currencies face growing pressure as fiscal dominance and political risks come under scrutiny, making CEE carry positions the path of least resistance for trimming.

CEE and African FX under pressure

"Our iFlow Carry index shows that high-yielding currencies are slowly seeing reductions in holdings, but we stress that there are major differences developing in the underlying drivers. On the one hand, low-yielding APAC (Asia-Pacific) currencies and even the EUR are driving the reversal, but on the carry-reduction side, the pressure is almost exclusively on currencies in Central and Eastern Europe (CEE) and Africa, even though these two clusters still have relatively strong holdings."

"LatAm currencies are now enjoying their strongest flow surge in six months and are significantly better held compared to other emerging markets currencies. In contrast, the EMEA region is now facing its strongest period of selling over the past six months, and CEE is looking particularly exposed."

"As FX valuations and holdings levels hit extremes, the bar is relatively low for profit-taking. We have been highlighting for some time that fiscal dominance risk is very high in CEE, and markets are now starting to pay closer attention to political developments."

"But if there are institutional factors behind the inability of CEE central banks to do the same, then the divergence is understandable, especially compared with LatAm (e.g., Colombia has resumed its tightening cycle, and COP is the strongest-performing currency in iFlow over the past month)."

"The bottom line is that the market needs to trim its FX carry holdings while volatility conditions allow, recognizing that flows in CEE represent the path of least resistance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)