Emerging market currencies flavour of the month again
AS GLOBAL bonds reel under hawkish rhetoric by major central bankers, Alliance-Bernstein and Amundi Asset Management say emerging-market currencies will weather the storm better than 2013.
Improvements in external balances, higher reserves and subdued inflation are among factors making developing-nation economies from India to Mexico appear less vulnerable to the risk of outflows when their advanced peers begin to taper, they say. Recent stability in exchange rates and a gauge of price swings near a threeyear low are signs of their resilience.
“This episode of rising developed-market yields is unlikely to be as negative as it was in the 2013 taper tantrum sell-off,” said Abbas Ameli-Renani, a London-based portfolio manager for EM bonds and currencies at Amundi, which oversees $1.2 trillion (R15.62trln). “We continue to be comfortable with currency exposure on higher yielding EM currencies with ongoing external rebalancing, such as the Mexican peso and Brazilian real.”
Central banks led by the US Federal Reserve are preparing to roll back easy credit policies as their economies recover and borrowing costs rise.
Need to tighten
Canada raised rates last week for the first time since 2010, becoming the first Group of Seven country to join the US in doing so, while the European Central Bank (ECB) and the Bank of England have hinted at the need to tighten.
The phasing out of stimulus is an unprecedented challenge that may be more disruptive than people think, JPMorgan Chase chairperson Jamie Dimon said last week.
The ECB’s governing council is scheduled to meet in Frankfurt tomorrow and on Thursday, with respondents in a survey split on whether officials might set the tone by dropping a pledge to boost quantitative easing if needed.
Even so, the MSCI Emerging Markets Currency Index is up in July, and higher from a month earlier, when the Bank of Canada surprised investors with a strong signal that it’s ready to raise rates. The JP Morgan Emerging Market Volatility Index fell last week, reversing a two-week advance, and still trades near its lowest level since 2014.
Further, the case for dollar bears is growing stronger as weaker-than-forecast economic data raises doubts about the prospect of additional Fed tightening this year.
HSBC Holdings says it is bullish on local-currency government bonds in Mexico, South Africa, India, Indonesia, Malaysia and Russia, citing an expected decline in inflation risk premiums.