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Fuelled by a bearish repricing of the Fed and optimism about a trade deal between the US and China, EM FX has staged a strong comeback since mid-December.
However, we do not expect 2019 to be smooth sailing for emerging market currencies. Many downside risks remain, a sharper-than-expected decline in the Chinese economy being one of them. The trade dispute with the US is already having a negative impact on growth sentiment in China through exports and manufacturing activity.
While we expect the Chinese government’s increased fiscal and monetary stimulus to prevent a disorderly slowdown, the economy could struggle as prolonged uncertainty hurts business and consumer confidence.
Weakening momentum in China is bad for EM, as it could reduce China’s imports of commodities and other goods from EM. It will also likely worsen the general risk sentiment towards EM.
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