JP Morgan cuts emerging market FX view on overcrowding worries

By Marc Jones

LONDON, Jan 19 (Reuters) – JP Morgan’s strategists cut the bank’s view on emerging market currencies to ‘market weight’ from ‘overweight’ on Monday, saying short-term positioning was now “overbought” following a strong year-long rally.

The U.S. investment bank, whose views are closely watched by traders, also cut South Africa’s rand to ‘market weight’ from ‘overweight’ having already cut risk in central and eastern Europe and adjusted its view on the Mexican peso over the last week.

“There are times to reduce risk in the short term due to overcrowding and this is one of those times in our view,” JP Morgan’s strategists said in a note to clients.

International investors rediscovered their appetite for emerging market assets last year despite the volatility of U.S. trade tariffs, as the lure of attractive interest rates and cheaper asset prices has been given extra impetus by a near 10% drop in the dollar.

The move back in has lifted MSCI’s emerging market currency index roughly 7.5% over the last 12 months, EM local currency debt has returned almost 20%, while MSCI’s EM stocks index has surged nearly 40%.

JP Morgan’s analysts said a fresh glut of inflows into EM since the start of the year had pushed the bank’s in-house EM FX Risk Appetite Index into significantly overbought territory and well above the threshold that triggers a “sell signal”.

“We have flagged the build-up of positioning in EM currencies and this is now enough for us to take profits in the short term,” they added.

They acknowledged that emerging markets had also had to grapple with “a lot of other noise” since the start of the year, starting with Venezuela, Iran, U.S. Federal Reserve independence, U.S. Supreme Court rulings and now Greenland with new threats of tariffs.

While these developments were not the key driver of the change in their EM foreign exchange view, JP Morgan analysts flagged that the key areas of worry could start to feed off each other.

“We often find that once the market is already over-positioned it can become nervous about newsflow that it might otherwise downplay,” they said.

“Given the low starting levels of vols and risk premia globally, this nervousness could show in a short-term pull-back.”

(Reporting by Marc Jones; Editing by Karin Strohecker and Emelia Sithole-Matarise)