Strong global recovery to support risk appetite for EM currencies – HSBC
|The parallels to the 2013 ‘taper tantrum’ are in focus for EM FX, but there are important differences. For example, EM FX has healthier external balances, slower portfolio outflows and low valuations. Despite the volatility, supportive foundations for most EM FX are expected to be in place in 2021, in the view of economists at HSBC.
Key quotes
“Many FX market participants remembered the damage to emerging markets (EM) FX caused by the ‘taper tantrum’ in 2013, and are wondering if something similar is about to happen today. Notwithstanding the comparable repricing of US yields, we believe EM FX has been relatively steadier this time around for good reasons – current account balances are healthier, portfolio outflows from EM are slower and valuations are low.”
“Our base case is that the strong recoveries in the US and elsewhere will eventually have positive spill-over effects to EM growth. Loose monetary policies in developed markets (DM) and vaccination progress globally would support risk appetite for EM assets. So we have pencilled in modest EM FX appreciation by year-end 2021.”
“Our external assumptions keep getting challenged and so EM currencies are still being tested. For example, it seems like the FX market is starting to shift its focus from the Federal Reserve’s commitment to policy easing against large fiscal stimulus to negative COVID-19 developments – resurgence of infections and vaccine deployment issues.”
“We suggest being defensive over the near term – preferring the less risky INR, the fundamentally strong RMB and SGD as well as currencies with idiosyncratically stories such as the BRL (amid rate hikes). The lift-off of volatility, inflation, and policy rates will be difficult to navigate, but this is likely to be a temporary adjustment before a smoother ride unfolds.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.