MENA FX: Carry unwinds pressure regional currencies – BNY

§ 01 Executive Snapshot

• What: MENA currencies experienced net selling in May following a brief respite in April.
• Who: BNY's Bob Savage, regional currencies of the MENA region.
• Why it matters: The performance of MENA currencies is influenced by rising global inflation and US rate expectations, impacting capital flows and market stability.

§ 02 Key Developments

• Most MENA currencies saw net selling in May after a brief recovery in April.
• The only currency that saw modest net buying was the Jordanian Dinar (JOD).
• Rising global inflation expectations and higher US rate expectations are pressuring frontier market FX.
• Capital inflows into Gulf economies and Egypt may slow further if Dollar cash yields increase.
• The narrative of Oman Rial (OMR) as a regional safe haven has diminished due to geopolitical developments.

§ 03 Strategic Context

• The MENA region's currencies have been under pressure due to global economic factors, particularly rising inflation and interest rates in the US, affecting market sentiment.
• The situation reflects a broader trend in frontier markets, where investor confidence fluctuates based on external economic indicators and geopolitical events.

§ 04 Strategic Implications

• The immediate consequence is increased volatility in MENA currency markets, affecting trade and investment flows.
• Long-term implications may include a reevaluation of investment strategies in the region as capital inflows become more sensitive to global economic shifts.

§ 05 Risks & Constraints

• Potential risks include ongoing geopolitical tensions that could further destabilize currency markets and investor confidence.
• There is also a risk that continued carry unwinding could lead to further declines in fixed income performance in the region.

§ 06 Watchlist / Forward Signals

• Monitoring the impact of rising US interest rates on capital flows into MENA economies will be crucial in the coming months.
• Investors should watch for geopolitical developments that could influence the perception of MENA currencies as safe havens or risk assets.