Emerging Markets: It’s a Break in, Not a Reversal of Bull Momentum - TDS

Emerging Markets: It’s a Break in, Not a Reversal of Bull Momentum - TDS

Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, suggests that since the start of the week, EM currencies have felt some negative pressure as the dollar gained strength.

Key Quotes

“Major DM currencies have posted comparable moves, but opposite in direction, with the EUR giving up 1.5% and the JPY 1.7% against the dollar in the same timeframe.

This adverse momentum has caused the ZAR to give up 4.5%, TRY to drop 4.3% (until the rebound earlier yesterday), and MXN, BRL and COP to retrace 2.9-3.5% in a little less than a week. In fact, it is hard to find any EM FX that has gained against the greenback since the start of the month.

Is this a worrying signal?

Perhaps, but first off, one should recognize that the vast majority of EM currencies, and the high yielding ones in particular, still are top year-to-date performers vs USD. The RUB and BRL have gained nearly 12%; COP and MYR are up by over 7%; CEE FX bar PLN, CLP and a few Asians, including SGD and IDR, have gained no less than 4%.

Even the underperformers have often appreciated to the dollar this year. PEN, PLN, TWD and KRW have done worse than the previously mentioned currencies, but have all posted positive returns nonetheless.

ZAR is somewhere in the middle of the range, up ‘only’ 3.5% in spite of the sharp rally since mid-January (USDZAR dropped 17% in a peak-to-trough move), but in this case, the initial part of the rally has merely offset the previous January losses, and the May correction has added more weakness to the rand.

More interestingly, TRY and INR have underperformed the EMFX group by losing a meagre 0.3% and 0.5%, respectively, which is largely compensated for by the carry on these positions. So an investor going long these currencies early in February would have still made a positive performance. More so for the INR than the lira as the rupee continued to sell off in the second half of January and until the end of February, but has steadily moved up since and, especially, hasn’t corrected as the lira so far in May.”