Heres another interesting take on whats driving the emerging market flows:
Societe Generale - This correction differs from your run of the mill. It was clear some EM reduction was already on the way a few days before the correction turned vicious and little of it showed classic contagion. The size of the EM pressure was of such a large size in more exotic destination (e.g. ARS) that some very large funds or banks must have been involved, otherwise reserve managers would have smoothed the pressure.
So who are the behemoth of such large scale re-allocation of capital. The WSJ reports a major Asian equity fund was unwound by its SWF backer last week. This is a decent clue. Ahead of Fed tightening, SWFs may be scaling down their hedge fund, equity and alternative investments holdings to concentrate into short dated government bonds (reserve managers run the short end). That is presumably very short dated UST and European bonds.
The price dynamics and ECB promising to fight deflation means that core and soft core European bonds are promising alternatives to equities. This suggests that the EUR should stay strong relative to its satellite currencies (smaller reserves will be squeezed for some USD liquidity).
While the Fed is widely expected to accelerate the pace of tightening, the adjustment in positions changes very little. USDJPY is likely to base and rebound quickly in the next 24h as VaR risk reduction runs its course. USDCAD even with such large long positioning barely budged in the past few days. That suggests the trend up is very much intact, the BoC there is clearly your friend”
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