MENA FX: Carry unwinds pressure regional currencies – BNY

BNY's Bob Savage notes that most MENA (Middle East and North Africa) currencies saw net selling in May after a brief April respite, with fixed income also underperforming. Rising global inflation expectations and higher United States (US) rate expectations are weighing on frontier market FX, while capital inflows into Gulf economies and Egypt could slow further if Dollar cash yields rise. Only Jordanian Dinar (JOD) was modestly net bought.

Carry unwinds and weaker safe haven story

"If April was a month of relief for MENA assets, that story did not continue in May: the bulk of currencies in the region were net sold, and fixed income continued to underperform."

"May was also a difficult month for frontier markets, as it brought a marked rise in global inflation expectations driven by the conflict."

"Energy prices are not a solid buffer, and the region’s currencies have been caught up in sustained carry unwinding."

"Ultimately, only JOD ended the month net bought, and the levels were mediocre at best."

"Meanwhile, the new “regional safe haven” narrative for OMR was severely curtailed, especially as geopolitical developments began to drive flow interest in addition to geographical advantages."