The hierarchy of needs is a concept based on identifying and obtaining the needs for motivation. There are basic and more complex needs and as these are increasingly met, then the ultimate goal of fulfilment is reached. This can be a useful template for us to think about EM FX, outlining how we could become more motivated and positive on them as a whole. 

There are basic needs such as looser US financial conditions and a stable or a gradually weakening USD that should be good for EM FX. Meanwhile, there are more complex needs for EM FX to outperform such as favourable EM growth conditions and sound macro policies that could see meaningful portfolio inflows return. Some EM currencies are in a better position than others at reaching this ultimate goal in the hierarchy of needs and are deserving of currency strength. Others, however, should continue to struggle even though the basic need of a softer USD environment, for example, has materialised. This highlights how the current set up for EM FX is not broadly favourable yet and local risk factors can still play dominant roles, and detrimental ones too. This has already been occurring with some EM FX currencies in recent months.  

We maintain a regional preference for Asian currencies and quality high-yield currencies such as the MXN. We explore our framework and other topics inside…