Synopsis:

SocGen’s latest analysis of the options market shows that sentiment toward most EM FX remains bullish, even after peaking in late May. The only clear exceptions are TRY and MXN, where the market sees limited near-term spot upside, highlighting select pockets of caution within otherwise constructive EM FX positioning.

Key Points:

• Risk Reversals Still Supportive:
  • SocGen uses 3-month risk reversals as a proxy for EM FX sentiment. While bullish positioning has eased slightly since late May, the signal remains firmly positive for most EM currencies.

• TRY: Policy-Led Drift:
  • The Turkish lira is an exception, with sentiment neutral to modestly bearish — not because of a major bearish turn in broader EM, but due to policymakers’ preference for controlled depreciation rather than strong appreciation.

• MXN: Rally Looks Stretched:
  • The peso is another standout, where the options market sees the recent MXN rally as over-extended, pointing to more balanced or even modest downside spot risk in the near term.

• No Signs of Systemic Risk Aversion:
  • Despite recent geopolitical shocks and Fed uncertainty, the options market does not yet reflect broad-based risk aversion in EM FX — implying that investor appetite for carry trades and high-yield EM exposures remains intact.

Conclusion:

SocGen’s read of the options market suggests that EM FX retains a bullish bias overall, supported by resilient investor demand. While some currencies like TRY and MXN show more nuanced or cautious positioning, the broader theme is that investors continue to lean long EM FX, reflecting confidence in the carry environment and relative macro stability.