EM View: Fearing the Fed

EM forex ought to be looking forward to a good 2019. In reality, there's much to fear, not least the Federal Reserve, whatever direction it takes.

Long shadow: Whatever the Fed does or doesn’t do in 2019, there are bound to be repercussions in the emerging-markets forex space. Photo: P_Wei/gettyimages

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Fearing the Fed
The markets have almost completely priced out any Fed hikes in 2019 and US Treasury yields have fallen well below 3%. That should be great news for EM FX. However, EM FX has not seen much benefit and now seems to be sailing in the calm before a storm. Either the Fed will continue according to its plan – bad news – or it won’t, and probably because the US economy has slowed down much more than expected, which is also bad news. 2019 could thus prove to be another difficult year for EM FX, where we believe EM central banks are more likely than not to hike policy rates to compensate investors for higher risks and thereby postpone any meaningful recovery in their respective economies.

CNY: The trade war persists
The key driver we see for the CNY are the ongoing talks between US President Donald Trump and China’s President Xi Jinping. The stop-and-go process has pushed CNY volatility to its highest since 2015. We expect USD/CNY to push through 7, if a ceasefire does not lead to sustained improvements.

RUB: Left hanging in mid-air
Sanctions remain the key driver for the RUB, in our view, keeping the currency on the weak side compared with fundamentals even with oil prices having dropped in recent months. We believe a pre-emptive rate hike and OPEC deal make RUB strengthening more likely, but probably only alongside more clarity regarding upcoming sanctions.

PLN: Worse before it gets better
Politics are also affecting the PLN as the government has accepted a ruling by the European Court of Justice. We believe the first rate hike is coming closer even if core inflation is still surprising to the downside. This should eventually strengthen the PLN.

In focus – ZAR: Challenging times ahead
The ZAR is our focus currency this month. Basically, we see the risks skewed quite heavily to the downside for next year, especially on the fiscal side and with the presidential election coming up.

* FX hedging considerations, the EM Traffic Light and financial forecasts are also covered in this publication.

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