Springtime in Emerging Markets – Danske Bank
Research Team at Danske Bank, suggests that one of the most striking features so far of 2016 has been the relative strength of Emerging Market (EM) currencies which has happened over a period when other risky assets generally plummeted.
“What explains this relative strong performance? First, many EM currencies were in cheap territory after being battered over the past two years since the tapering discussion started in May 2014. Furthermore, after a turbulent start to the year, the worst fears about a meltdown in China have abated and commodity prices have seen a recovery. The G20 finance ministers and central bankers’ meeting in Shanghai, while not resulting in a grand growth plan, seems to have ensured closer coordination between the world’s biggest central banks, supporting global risk sentiment.
Will EM currencies continue to do well? They may well; at least as long the Fed maintains its relatively dovish stance, which it signalled on Wednesday (16 March). In a way, the combination of a relatively healthy growing US economy (ensuring demand for EM exports) and subdued wage growth (taking the pressure off the Fed to raise rates) may be the best of both worlds for EMs.
Commodities seems to be finding a stronger footing after a couple of difficult years. Oil producing countries finally seem to be talking about cutting back on excessive production with both OPEC and non-OPEC countries planning to meet next month and a relative dovish FED is also helping. Furthermore, the Chinese construction sector is again showing signs of life as housing starts are starting to rise. As the world’s second most important commodity importer, a rebound in Chinese construction activity is good news to mining EMs such as Brazil, Chile and South Africa.
So, are EMs out of the woods? For now yes, but there are certainly several that are still struggling with the aftermath of the collapse in commodity prices amid weak political situations (most notably Brazil and South Africa). In addition, Fed angst may well return in the late summer if the steady improvement in the US economy continues. Therefore, EM countries should probably enjoy the springtime while it lasts.”
(Market News Provided by FXstreet)