EM FX: After starting on the back foot, remarkable resilience displayed – Goldman Sachs

Kamakshya Trivedi, Research Analyst at Goldman Sachs, suggests that in the face of a global risk sell-off, concerns around the pace of US activity and a reawakening of dormant systemic worries, EM currencies – typically the risk asset par excellence – regained all their losses and are flat year-to-date, both on a USD and a TWI basis. 

Key Quotes

“We attribute most of this resilience to the local rebound in oil prices and the stability in CNY fixes that has also anchored $/CNH levels. The rally in global rates has also been helpful by alleviating funding pressures, but we have found that lower US rates, which tend to accompany economic slowdowns, are historically associated with weaker EM FX (although they do drag EM local rates lower). 

The minutes of the January FOMC meeting suggest that the Fed is likely to be more patient than previously expected, implying a friendly global fixed income backdrop for EM for a while at least, even if it does not improve incrementally. This means that, for now, EM FX direction is likely to be set by (i) the dynamics in oil prices, given the very tight recent correlation with EM currencies, and (ii) the ups and downs in China’s ‘bumpy growth deceleration’ and uncertainty around the path of the CNY.”