Emerging markets have swooned big time against the US dollar and this has all happened in the second quarter. This leaves the asset class on track for its worst possible run since the China drama ignited three years ago. This drama all came down to the fact that they were interested in having a heavy rout. The currency index has dropped by over 5.1% and this happened since March. There has also been a lot of Bloomberg data present as well. This is the biggest drop since the third quarter in 2015 and this is not good news to say the least.
The measure works by tracking 10 EM currencies and this is all done against the buck. If you were to look at the broad dollar, you will see that this delivered a harsh second quarter for the EM and this has all happened in a very short space of time. The head of currencies and strategies has stated that the rouble has also faced the heaviest rout and that this has tumbled over 9.7% against the dollar. The peso for Argentina has dropped 8.2% and the Turkish lira has also dropped 7.2 percent. Of course, it’s important to know that the countries that have been hit the heaviest have all been facing their own issues. Russian companies and even various executives have been hit with huge sanctions. This all happened in April and the central bank for Argentina has boosted the rates three times over a week-long period. This is said to be in an attempt to try and convince markets to try and cool down the level of red hot inflation. It looks to have paid off when you look at the bigger picture, but there is no real way of telling whether this will pay off in the long term or not.
The lira went down and the reason for this is because of local stories. Higher US rates and the very strong dollar means that other countries will lose out. EM investors have enjoyed the low borrowing costs of the more developed markets and this has been combined with having very high yields elsewhere. The tide however is changing and now the Federal Reserve is at the forefront of the picture.
It has been tightening and the rates have been raised more than 6 times in the last couple of years. They are said to try and raise their benchmark two or even three more times in the upcoming year and this is according to the experts at the CME group. The dollar has resurgence against the EM and DM peers but a lot of analysts have doubts about this. They are concerned about the durability of the rise. The European head of currency has also pointed out that investors have in fact been down this road before, and that this is nothing new. A lot of FX investors chose to buy the dollar in 2017 and they did this because they thought that the Fed rate would rise.
That didn’t happen and it isn’t working now either. A lot of people think that EMS should be able to withstand a huge deal of tightening and even the policy in general when you look at the advanced economy.
The fed chief also made a good point. He stated that EMS should be able to withstand some tightening of policy in the advanced economy. He stated that a lot of people have bolstered their own defences and this came after a number of crises. He also pointed out that Fed tightening has not actually halted the capital inflows to EMS. Even so, some investors may find this to be a little alarming and this is completely normal.