Bullish signals for emerging-market currencies weaken as external debt inflows slow

Why are emerging-market currencies still favored but lacking momentum?

Bank of America’s composite emerging-market FX sentiment indicator shows a 40% bullish bias, but is moving toward neutral. Upward revisions to growth expectations, which supported the bullish view over the past month, peaked in early October, and the tailwind from global factors in October has also begun to reverse.
Emerging-market currencies’ sensitivity to global factors, especially gold, fell markedly in October. Bank of America therefore believes the dollar-weakness trade has faded significantly. Correlation in currency moves has risen again, creating an unfavorable backdrop for exchange-rate performance.
The options risk premium has risen above its one-year average, offering some contrarian support, but overall valuations lack appeal and investors’ long currency positions are already somewhat crowded. The upward trend in the dollar against emerging-market currencies has flattened but has not reversed.

Bank of America’s strongest currency signals are long positions in the Brazilian real and the Chinese renminbi: both are undervalued relative to fundamentals and expectations, offer high carry relative to volatility, and are supported by monetary conditions and trends.
A short position in the Philippine peso is also a strong signal: its money supply is loose relative to economic activity, and its downward trend is accelerating.
One tail risk is that high-carry commodity exporters that were relatively defensive during the war now have monetary policies that are looser relative to domestic economic activity, weakening the protection offered by carry.

The global trade in rising rates paused in October, but did not turn into a broad downward trend in rates: the share of markets in a downward trend remained below 10%, markets began to diverge, and sensitivity to global factors fell to near pre-war levels.
Bank of America therefore prefers regional relative value to betting on an overall decline in rates. Its ideas include receiving South African 10-year rates and paying Polish 10-year rates, as well as receiving Malaysian 2-year rates and paying Indian 2-year rates. The former reflects an expected strengthening of South Africa’s downward trend and the fact that Polish rates remain relatively expensive given the fiscal deficit and inflation expectations; the latter reflects an expected acceleration of India’s upward trend and a possible peak in Malaysia’s trend.
This choice remains constrained by valuations and timing: emerging-market rates are generally expensive, and November brings event risks including a Federal Reserve meeting and the US midterm elections.

The three-month average of weekly inflows into emerging-market external debt has fallen to its mid-April 2026 level. The premium on newly issued bonds relative to bonds of the same rating is nearly 0.8 standard deviations above its one-year average, indicating weaker primary-market pricing.
Fund flows and new-issue pricing show that pessimism is being priced in, but fund returns have yet to show signs of a market bottom, and positioning remains somewhat crowded. Bank of America’s external debt sentiment indicator shows a 50% bearish bias.
According to Bank of America’s model, spreads on emerging-market B- to BB-rated bonds over similarly rated US bonds are approximately 60 basis points tighter than fair value, so valuations remain expensive. Despite its overall bearish stance, the bank sees opportunities in certain spread curves and in the yield differential between currency-hedged euro bonds and dollar bonds; that differential exceeds 50 basis points for Brazilian and Moroccan bonds.